Crypto Insurance Demand Significantly Larger Than Estimated $6 Billion Supply


The imminent entry of Wall Street giants and other large institutional investors into the cryptocurrency market is set to see a shift in approach as big money rolls into the emerging asset class.

One “critical condition” that the crypto market needs to make institutional investors “feel at home,” is the provision of adequate insurance against any eventualities like theft or other such losses.

But, according to estimates on the subject, the total insurance coverage the industry can provide is nowhere near what the market will need with the entry of big money players.

Insurance supply much smaller than demand

Estimates put the total insurance coverage currently offered to digital asset custodians and exchanges at $6 billion.

It may appear considerable, but it’s only a drop in the ocean, given that some of the leading cryptocurrency exchanges exceed $1 billion worth of trades every day. Even after the recent sell-off, the total cryptocurrency market capitalization stands at over $140 billion.

So, even with optimism teeming about the potential for crypto to cater to the investment demands from Wall Street, a $6 billion insurance market is too small.

As quoted by reports, a market leader at Aon insurance Jacqueline Quintal concurred with this dim view, saying:

“Total available capacity for crypto-related crime insurance placements starkly lags demand.”

The Winklevoss’ crypto exchange recently announced that Gemini’s hot wallet balances are insured by Aon. Although hot wallets typically account for a tiny fraction of users’ funds, it is the balance that is most at risk of being hacked.

New kind of asset class

Because crypto is primarily a bearer asset, associated risks of theft and loss remain. Already, criminals have kidnapped and tried to extort bitcoin holders in several countries, including the Netherlands, the U.S, and India.

Even with the figure notably dismal, a few players are taking the right steps to address their respective businesses. One such player is leading U.S crypto exchange Coinbase that accounts for $250 million or 5 percent of the total estimated industry coverage.

Coinbase is one of the crypto’s largest consumers and has obtained insurance coverage since 2013. However, even then, the figure is still too low given there’s what we call co-insurance. In this case, part of the claim is paid by the insured party, which means that only $100 million goes into risk transfer, instead of the over $200 million.

Crypto insurance for ‘hot’ and ‘cold storage’

Crypto insurance in the current market comes in two modes that cater to commercial crime markets and another for the specie market.

In crypto terms, the commercial crime cover provides insurance for “hot” wallets, while the specie cover caters to assets stored in cold storage.

Current estimates put the commercial crime crypto capacity at between $750 million and $1 billion.  An unidentified source also told Coindesk that the cover for the specie market tops at between $3 billion and $5 billion.

In total then, the insurance coverage in cryptocurrency comes to about $6 billion.

Lloyd’s of London leading underwriters

Reportedly, London-based Lloyd’s provides the largest share of crypto insurance underwriting. However, Coinbase has also involved New York-based underwriters in its policy, the first time it has happened in the crypto space. There’s also a tinge of interest out of the Bahamas.

Lloyds of London, a 330-year-old insurance player, has therefore emerged as the top destination for crypto policyholders. The British firm allows its members to work together as syndicates as they offer insurance, spreading the risks involved.

At the moment, Lloyds provides the largest share of underwriters taking on crypto policies. In 2017, about 85 Lloyd’s syndicates, wrote a total of $43.3 billion in gross premiums that covered an array of property and liabilities.

The firm has however warned syndicates to be cautious scrutinize every detail when writing crypto policies, mainly because the emerging industry is rapidly evolving.

Disclaimer: This is not investment advice. Cryptocurrencies are highly volatile assets and are very risky investments. Do your research and consult an investment professional before investing. Never invest more than you can afford to lose. Never borrow money to invest in cryptocurrencies.

Leave A Reply

Your email address will not be published.