Virtual currency may be an inevitable part of our increasingly virtual world, but that doesn’t mean insurance companies have to like it – or insure it.
Insurers are comfortable with what they know – with what they can measure and predict. Bitcoin, the foremost virtual currency out there, represents new and unusual risks that are hard to measure or predict. As a result, there’s not a lot of coverage out there for bitcoin exposures. At least not so far.
I recently caught up with Willis digital expert Paul Ma of our Financial Institutions Group, who offered some insight on the subject.
The first problem insurers have is they don’t understand how it all works. Hard to blame them, what with a whole lingo associated with the virtual currency world. Bitcoin is technically a decentralized cryptocurrency. Underwriters can be forgiven if they’re hesitant to cover something that sounds like it came out of a spy thriller.
The second problem is that the risks are obvious and high. This is money we’re talking about. I can’t help repeating the story of the legendary thief Willie Sutton who, when asked why he robbed banks, said, “Because that’s where the money is.” The Willie Suttons of today don’t have to leave their bedroom in their attempts to break into the digital vaults. The threat is as real as the currency is valuable: one of the largest Bitcoin repositories was hacked not long ago – to the tune of 850,000 Bitcoins, worth over $300 million. Since then, insurers have pretty much closed the door to Bitcoin risk.
Another problem is the lack of regulatory framework. Regulations offer guidance on safety precautions and help set security standards. Federal and international regulations would go a long way to support effective risk management of virtual currency.
Finally, there is little policy language out there that directly and effectively addresses these exposures.
This last problem is something Paul and his colleagues are working on. They are also sitting down with carriers and helping them understand how the bitcoin world works and how they might go about insuring it.
The commercial insurance market might be struggling to find ways to insure against the unusual risks posed by virtual currencies—but that doesn’t mean risk transfer solutions aren’t available. One option is for companies to self-insure, through the use of a captive. Captives are frequently used when the insurance market does not respond with sufficient capacity in a cost-effective manner. Self-insuring using a captive structure can also help lay the foundation for bringing conventional capacity on-board. For example, Willis was recently appointed to set up and manage a captive, domiciled in Bermuda, to help protect a Bitcoin company against hacking, theft by an employee, a break-in at the physical vault and bankruptcy.
In our industry we often say that nothing happens without insurance. In this case, insurance is catching up.