Insurers are likely to review or amend policy wordings to ensure they are not indirectly insuring losses
The cryptocurrency crash could accelerate the process of insurers rewriting policies to reduce potential exposure, including making greater use of virtual currency exclusions, warns international law firm RPC.
The crash in cryptocurrency prices in recent weeks has resulted in billions of dollars of value being wiped off cryptocurrencies.
As a result, insurers are likely to review or amend policy wordings to ensure they are not indirectly insuring losses arising from the activity of insureds who may have involvement in cryptocurrencies.
This is likely to include greater use of virtual currency exclusions, which would prevent policyholders from making claims for any losses on cryptocurrency assets.
James Wickes, partner in RPC’s Insurance group, says: “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.”
Putting assets into ‘cold storage’
Given the lack of regulation in the cryptocurrency market, a relatively small number of insurance providers currently provide capacity to underwrite crypto insurance risk. Of the crypto-related risks that are currently insured, coverage is more readily available for theft.
These insurance policies typically stipulate that insured assets must be held in offline wallets – known as ‘cold storage’.
Some crypto firms will advertise the fact that they have insurance policies to protect their clients’ crypto assets underwritten by household insurance brands to attract new investment.
However, there is a risk that investors misunderstand the scope of the insurance in place and it is important that crypto firms are not overstating the extent of coverage, otherwise they may find themselves on the receiving end of claims.
James Wickes says: “Volatility in the crypto market is proof of just how difficult it can be to model for some risks.
”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.”
Directors face more scrutiny
Higher levels of regulation in the cryptocurrency space are also likely to put upward pressure on premiums. Claims may be taken against directors and officers if an exchange is found to have fallen short of regulatory requirements.
Directors of cryptocurrency firms (ie exchanges) could also face action from investors/shareholders alleging they suffered losses due to breaches of duty by the directors and officers.
Given the increased regulatory scrutiny and risk of litigation resulting from current volatility, it is likely that premiums for Directors & Officers (D&O) insurance will increase.
James Wickes explains: “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.”