Best’s Commentary: Sketching a Risk Profile for the Emerging Crypto Market

Greater interest by institutional investors and regulatory clarity are cited as two factors that may help fuel insurance growth for the nascent cryptocurrency industry, according to a new AM Best commentary.

Quantifying the emerging cryptocurrency and digital asset insurance segment is challenging, as surveys generally indicate ownership of digital assets among the U.S. population ranges widely. The commentary states that insurance penetration in the crypto sector is very limited and many individual crypto holders value anonymity and often avoid disclosing their assets. An early June estimate from Coinbase.com places the cryptocurrency market’s capitalization level in excess of $3 trillion, excluding non-fungible tokens (NFTs), tokenized real-world assets, and DeFi-related products. That figure is subject to significant shifts, fueling reluctance in part.

According to the commentary, traditional insurers have historically hesitated to offer coverage for crypto because these assets are non-traditional, intangible, extremely volatile and there is little actuarial data or claims history to guide underwriting.

“A limited number of traditional carriers currently write crypto coverage, often through surplus lines or specialty markets,” said Edin Imsirovic, director, AM Best. “This reluctance stems from a number of factors, including cybersecurity and theft risk, because crypto assets are vulnerable to hacking, and private keys are vulnerable to theft and fraud.”

Concern over the potential for catastrophic losses and accumulation risk have hindered insurers’ willingness to partake in the market. Insurers lack the experience and data to make informed predictions about price adequacy. Many insurers have only cautiously offered crime insurance or custody insurance with strict limits and security requirements.

“Insurers worry about loss aggregation, and as a result, insurers that do write crypto often provide low coverage limits,” Imsirovic said. “Insurers rely on historical loss data to price and model risks. For crypto, meaningful loss data is scarce, given the short history and many companies self-insuring in the past.”

To access the full copy of the Best’s Commentary, “Sketching a Risk Profile for the Emerging Crypto Market,” please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=354617.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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