Cryptocurrency crisis leading to insurance policy wording amendments

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The cryptocurrency crash could accelerate insurers rewriting policies to reduce potential exposure and make greater use of virtual currency exclusions, international law firm RPC has warned.

In recent weeks, the crypto crisis has resulted in billions of dollars of value being wiped off digital currencies.

Bitcoin, for example, sits at $21,297.30 (£17,948.19) as of 17 July 2022 – down from the $28,000 to $32,000 crypto benchmark range during May, as reported by Forbes Advisor on June 29 2022.

Insurers, as a result, are likely to review or amend policy wordings to ensure they are not indirectly insuring losses arising from the activity of insureds who may be involved in cryptocurrencies.

This development is likely to precipitate greater use of virtual currency exclusions, which would prevent policyholders from making claims for any losses on cryptocurrency assets.

James Wickes, partner at RPC’s Insurance group, said: “The relatively small number of insurers currently active in the crypto asset insurance space are likely to be keen to review the fine print on policy wordings to limit potential exposure from the volatility of the crypto markets, as demonstrated by the recent crash.”

Risk bravery 

Of the crypto-related risks that are currently insured – despite a lack of relevant regulation in the market – coverage is more readily available for theft, where policies stipulate that insured assets must be held in offline wallets known as cold storage.

“Volatility in the crypto market is proof of just how difficult it can be to model for some risks,” said Wickes.

“The insurance market for these assets is in its infancy and it remains to be seen whether a sufficient body of insurance carriers will be prepared to provide enough capacity to meet the demand and how brave the market will be to extend coverage beyond the traditional theft risk,” he added.

Ankur Kacker, specie practice leader in the FINPRO business at Marsh, meanwhile, said regulation was needed if the future of cryptocurrency was to be successful – he said there needed to be regulation implemented at a global level becaue crypto-volatility is not a “country-specific problem”.

“In order to really take this to the next level, I think there needs to be joint effort between the regulators of these industries [equities, banking and insurance] because a lot of institutional investment will come in if insurance is available,” he added.

Earlier this year, the FCA held CryptoSprints – an opportunity for 200 participants to thrash out policy solutions.

In a speech at the Peterson Institute for International Economics on 14 July 2022, FCA chief executive Nikhil Rathi said “participants told us they wanted a regulatory regime for cryptoassets as a high priority – a matter that is not up to us to decide.

“They also want regulation phased in over time, to allow firms and investors to prepare and for the rules to fit the evolving crypto assets.

“In the past, innovative firms would have been pleading for less regulation. Now they understand and appreciate that rules are there to help provide certainty.”

Premium pressure

According to RPC, higher levels of regulation in the crypto market were likely to place upward pressure on premiums because risk of litigation resulting from volatility was likely to increase premiums for directors and officers (D&O) insurance.

Claims, for example, may be taken out against directors and officers if an exchange is found to have fallen short of regulatory requirements.

Directors of crypto firms – such as exchanges – could also face action from investors or shareholders alleging they suffered losses due to breaches of duty by directors and officers.

Wickes said: “Regulators will be watching keenly to determine if actions taken by directors of crypto exchanges have been to the detriment of investors. Given the huge amounts of losses that have been realised during the crash, it is likely that investigations will follow.”