As interest and investment into digital assets enters the mainstream, so too has the Specialty Insurance market, known for devising insurance solutions for hard to insure risks, responded with offering new and innovative products. How does an insurer assess the risk of an asset class known for its volatility, and potential dark web or illicit activity? It is not without challenges, given that the market relies on a deep understanding of risk based on data to price the risk, and where there is as yet relatively little historical data available.

We were delighted to talk to James Croome, the Active Underwriter at Arch Insurance, a little while back, to talk about how the Specie market is providing capacity for loss or theft of private keys, some of the challenges involved and how the market is evolving.

A few highlights:

  1. The Specie market is well known for protecting high value collectibles such as fine art, wine and other tangible high value assets.
  2. To an extent, protecting cryptocurrency risk is analogous to a high value collectible, as the private key is also a high value asset.
  3. However, cryptocurrency risks are also very different.
  4. Unlike a tangible asset, where the insurer is protecting the physical possession of the asset, for cryptocurrencies it is the knowledge of the private key - the alphanumeric string of numbers that unlocks access to the value of the cryptocurrency - that the insurer is protecting.
  5. This changes the fundamental nature of the risk and requires a ground up re-write of the insurance product to properly respond to protect the risk.
  6. Risk management protocols that deal with processes such as private key ceremonies are a vital component of the assessment of the risk. Private key ceremonies are not an ancient art but a critical component of what's known as public key infrastructure (PKI) that generates the public and private keys, how they are encrypted, decrypted and secured, to allow for secure access to cryptocurrency wallets to perform cryptocurrency transactions.
  7. When devising their risk management protocols insureds must take on an attacker's mindset.  To devise processes to help eliminate or mitigate the risk they are seeking to transfer from their balance sheet to the market they need a red team ask: "How can I break into the system?"
  8. Despite progress, the current capacity in the Specie market is a drop in the ocean compared to the potential value exposed from a single insured, let alone the total value of all cryptocurrencies.
  9. It is not certain how fast will the market evolve to offer more capacity and broader coverage. There is certainly no crystal ball!  Data and results are needed to properly assess the risks, and this includes a willingness to share claims experiences within the market to help further all stakeholders' understanding.
  10. Despite the challenges, the Specialty Market is responding to seek to meet the insurance needs of their customers.  As experience of the asset class grows so too will the understanding of the risks, and along with it an informed view of whether insurers wish to enter these risks onto their balance sheets.

When devising their risk management protocols we require our insureds to take on an attacker's mindset. In order to devise processes to help eliminate or mitigate the risk our insureds are seeking to transfer from their balance sheet to ours they need a red team to ask: "How can I break into the system?"

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.