Insurance Lead – International and Emerging Risks
The cryptoasset insurance industry, although small, is gaining momentum. Mirroring the rise of institutional adoption and interest in the wider markets, insurers are tentatively looking over the fence and are becoming increasingly interested.
Most insurers are still wary of cryptoassets as the industry has suffered continuous PR issues since the birth of Bitcoin in 2008, but we’ve found that more markets are at least open to have discussions around the risk and are self aware enough to know they need more education. These stigmas and biases in the financial industry are incredibly hard to overcome and can only be done with education and time.
Education around crypotassets is something Superscript is passionate about and we’ve recently given a number of talks to insurers on blockchain and digital currencies. These talks delved into some facts and figures about cryptocurrencies and aimed at dispelling the myths that insurers held true, we also discussed the coverage implications of crypto and some ways to underwrite risks in this space.
We finished with a live underwriting discussion on a couple of files for them to get a feel for the types of companies we see and openly discuss the exposures and how’d they underwrite it.
Mutual understanding is key to getting the right cover
If you’re a company in the cryptoasset industry, there has never been a better time to work with a broker then there is right now. We’ve been increasingly asked by prospective clients to help them place their insurance where other brokers have failed to do so, getting someone who understands the industry, the terminology and the ethos is imperative if you have any chance of placing your insurance.
This is important, as when I started my insurance career I held the belief that the fewer questions I asked and the quicker we could get the limited amount of information from the client the better it would be. I realise how backwards that thinking is as insurance runs on information, the more information you have the better likelihood there is of finding the best insurance terms out there.
Asking the right questions
This is what drives us here at Superscript, we ask a lot of questions. We’re proud of it. Asking questions, the right questions, is how we’ve been able to grow our book of digital asset clients from a handful, to acquiring some of the biggest brands in the space. We routinely get feedback from our insurance company partners that the information we submit on each of our clients is far more thorough than our competitors.
This is all to do with asking the right questions and reflecting the right risk management implementations to our carriers. There is however, a fine balance that needs to be struck. We don’t want to give too much information that doesn’t have any bearing on the risk as underwriters can get overwhelmed and ‘over underwrite’ the risk which often leads to more questions and the whole process can slow down or get derailed.
What insurance do cryptoasset companies need?
If you’re wondering what types of insurance are out there for companies in the cryptoasset space, it largely depends on the type of company you run, but it largely boils down to:
- Professional indemnity insurance
- Cyber insurance
- Crime insurance
- Directors and officers insurance (D&O)
Securing D&O insurance as a cryptoasset company
The first cover we usually advise our clients to have is D&O insurance which protects the Directors & Officers for any liability they would assume for allegations of mismanagement. Unlike other policies, a D&O policy covers the directors personally for claims, as if they get named in a suit their personal assets could be at risk.
This is compounded even more by the fast moving and ever-changing nature of crypto where directors need to be very careful to follow regulations and compliance. We’ve been able to find D&O policies for a wide range of business, from wallet service providers, to DEFI projects and exchanges; there is appetite out there for crypto risks but there are a few things you should keep in mind that could sway the insurers when deciding to give you cover or not:
Insurers want to see that you have credible members on your board of directors and that these members have experience across tech, finance, compliance and digital assets.
Financials are one of the most important pieces when underwriting D&O. Insurers will be looking at your burn rate, when the next funding round is, if the company is loss making (likelihood of turning a profit) and who the investors/ shareholders are. All of these factors greatly influence the decision and clients should make sure to provide the most up to date financial statements. If nothing has been prepared then pro forma financials will suffice.
Insurers want to understand if you’re regulated and how you’re meeting Know Your Customer and Anti Money Laundering regulations. Most companies outsource this function to a third party which helps underwriters.
No matter what insurance you’re looking for, we will always ask you how the private keys are managed and what security features you have in place to safeguard the assets. What really helps is if the client has a flow chart of how funds move between different wallets and the various physical security features in place. This helps as it simplifies everything for the underwriters to understand and get a clear picture of the security profile.
Org chart and ownership
This is also really important as where the company is domiciled has a big influence on what markets can look at it and what type of cover they can give. For example, companies domiciled in the US have a much harder time of finding insurance as the US is constantly moving the line on regulation and compliance. This uncertainty is hard for most insurers to get comfortable with and so prefer to insure companies with minimal US exposure.
Does it make sense? It may sound simple, but making sure there is a strong business case for both the product and the token is really important. Insurers want to see that there is a clear use case for the token and that it wasn’t just used as a mechanism for funding and then has to be shoehorned into a process for the holders to be happy. Too often are there tokens without clear use cases that spell potential lawsuits when investors are not happy with what they can use the tokens for.
There are, of course, more factors that go into underwriting a company in the cryptoasset space for D&O insurance but this will give you a good idea of some of the things that insurers look for.
At Superscript, we believe that for the world to move forwards entrepreneurs need to take risks in order to do so, and that’s why we do what we do. We also remain convinced that any advancement by the Human race will also need to have a corresponding advancement in asset exchange and transfer.
This is why we believe the digital asset space is here to stay and why we dedicate so much time to educating the market and working with cryptoasset clients. By helping these innovative companies take more risks, we’re helping move the dial across the entire industry and in some small way, hopefully move society towards greater financial inclusion and financial services for all.
We believe it’s time the insurance industry unlearns their biases and we’ll be here helping them every step of the way.