Why it is Hard to Insure Cryptocurrency Operations: 5 Reasons Why?

When buying insurance for any business, the insurer usually determines whether it is willing to provide coverage based on several factors. These include the type of business, its operational risks, and the potential cost of a claim. Whether an operation deals in cash or third-party intermediaries, insurers will typically consider a range of factors when determining whether to offer coverage. So why is it difficult to insure cryptocurrency operations? The truth is that many insurers have not yet developed strategies for evaluating and pricing risk in cryptocurrency operations.

Lack of Historical Data

Insurers often rely on historical data to determine potential loss potential. Most insurers, however, have little or no data upon which to base a loss prognosis for cryptocurrencies. Many cryptocurrency exchanges have been in operation for only a few years. And even the most established cryptocurrencies, such as Bitcoin and Ethereum, have only been in existence for a few years. Consequently, insurers have no historical data from which to develop loss prognoses. Moreover, many insurers rely on large multinational risk-modeling firms to develop their loss prognoses. Unfortunately, most of these firms have not yet developed models for cryptocurrencies. Cryptocurrencies are so new that insurers and risk-modeling firms do not have an adequate sample from which to develop loss-prognosis models.

Lack of Transparency in Cryptocurrency Operations

Insurers want to know the identity of the people running a business and its operational details. They want to know who will be handling the funds, where they will be located, and how they will be transmitted. For example, if the insurer is providing coverage for a cryptocurrency exchange, it wants to know the names of the people who are running the exchange, the location of its servers, the type of software it uses, and the details of its financial transactions. Unfortunately, in many cases, cryptocurrency exchanges are not fully transparent. The operators of some exchanges have been reluctant to provide details to their insurers, particularly if they are using nonstandard contracts.

Large Loss Potentials for Claims

Many cryptocurrency operations rely on relatively small insurance policies to protect against large potential losses. These include coverage for business interruption (BI), data breach, and fiduciary liability. Data breach policies are particularly important for many cryptocurrency operations. This type of policy protects a business against losses that result from a cyber-attack on its computer systems. Although some cryptocurrency operations have been able to buy relatively small data breach policies, others have encountered challenges. Many insurers have refused to issue data breach policies to cryptocurrency businesses. Some have done so because they consider cryptocurrency operations to be too risky. Others have refused coverage because they want to know more about cryptocurrency operations before issuing a policy.

Lack of Standardized Contract Language and Practices

Insurers use standardized contract language to determine the amount of coverage for losses that are likely to occur. In many cases, however, they have not developed standardized language for cryptocurrencies. Consequently, insurers have yet to determine the amount of coverage for potential losses. Unfortunately, many cryptocurrency businesses have used nonstandard contract language in their policies. Consequently, insurers do not know what type of coverage the cryptocurrency operations have purchased.

Conclusion

Insurance companies are hesitant to provide coverage to cryptocurrency operations due to several reasons. The historical data concerning cryptocurrencies is limited, which makes it difficult to estimate the potential loss. The lack of transparency in the operations can complicate the process of investigating potential losses. Additionally, the lack of standardized contract language and practices can affect the amount of coverage cryptocurrency operations receive.