Navigating the future of crypto

How to mitigate exposures in the digital realm

Navigating the future of crypto

Insurance News

By Nicole Panteloucos

The meteoric rise of cryptocurrency has captured global attention, and Canada is no exception.

As currencies like Bitcoin and Ethereum move from the fringes of finance into the mainstream spotlight, their influence is shaking up traditional industries in unprecedented ways.

Following last week’s announcement that cryptocurrency exchange platform Coinbase is launching its new smart wallet, accessing digital currency is set to become easier than ever.

As the platform hopes to bring over a billion users onchain, the insurance sector is at a crucial juncture and must innovate to meet the unique demands of this evolving market.

In an interview with Insurance Business, Kyle Nichols (pictured), managing director (Canada), and Andrew Barnes, technical assistant, both from Risk Strategies, highlighted the crucial aspects of insurance within the crypto industry, discussed the risks associated with digital assets, and outlined future market trends.

“The more big names that come into Canada, the better. Crypto, as a store of value and a currency, is here to stay. I’m hoping we’re going to see more capacity and flexibility in the marketplace,” Nichols said.

Risk of internal theft

Despite the range of potential benefits offered by digital currencies, including decentralization and lower transaction costs, significant risks persist, necessitating comprehensive insurance solutions to protect stakeholders in this space.

Crypto trading platforms, much like traditional financial institutions, require coverage such as directors and officers (D&O) insurance, professional liability, cyber insurance, and specialized crime insurance.

Given the various exposures introduced by the digital environment, it's crucial for insurance brokers and underwriters to have a deep understanding of these elements to provide effective protection.

"Internal theft remains a major concern," Barnes said. "It's crucial for crypto companies to have strong role delineation within their operations.”

To effectively mitigate theft risks, Barnes advised that companies develop comprehensive measures for crypto transfer approvals, implementing stringent controls to ensure security.

“You're not just moving a physical asset; you're navigating a digital environment, which introduces a range of new risks,” he said.

Crypto underwriting: what’s important?

Underwriting a crypto insurance policy involves a thorough assessment of a company's insurability. This includes evaluating their policies and procedures, security measures, and financial health.

“As a specialized broker, we tend to do the first underwrite, or the sniff test, if you will, making sure that these companies are insurable,” Nichols said.

Barnes added that when underwriting risks for crypto platforms, it is essential to carefully consider factors such as the hardware and software they use, their interactions with third parties, and their ability to meet financial obligations.

“These are some of the things you would expect to see from a normal underwriting process for financial lines,” he said.

A promising future

Looking ahead, Nichols and Barnes anticipate greater adoption of cryptocurrency will drive increased demand for domestic underwriting capacity.

While markets in Bermuda and London tend to be a step ahead, developing expertise in Canada could help address pricing challenges.

“Understanding feeds into availability, which then feeds into pricing. As the understanding of crypto increases, and people become more comfortable with it… there will be more market competition, which means premiums will go down,” Barnes said.

As understanding and regulations adapt, Nichols expects the market to mature with more tailored coverage options.

“We might see more product development, more tailored coverage terms that come through the marketplace as well. Within these specialized crime policies that we deal with, we’ll probably see a bit more flexibility and innovation there,” he said. “We’re hoping to see more Canadian capacity come on board.”

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