Retail Crypto Insurance: Protecting Crypto Holdings Becoming Mainstream

Insurance underwriters associated with Lloyd’s of London are now backing a new liability policy designed to protect cryptocurrency stored in online wallets. With a modest minimum of 1,000 British pounds ($1,275) in protected assets and rather flexible terms, the product seems to be geared for retail and corporate investors. But who is behind the novel service, and how will the policy work?

Forces behind the innovation

Despite the enthusiasm expressed in early media accounts for “insurance giant Lloyd’s backing crypto,” Lloyd’s of London is not an entity to which any centralized agency can be ascribed. Unlike most other major players in the field, it is not an insurance company, but rather a marketplace where insurance underwriters and brokers meet to assess and pool risks. This corporate body boasts a centuries-long history, with its governance structure codified in the 1871 Lloyd’s Act.

Lloyd’s hosts both individual and corporate underwriters, the latter being referred to as syndicates. If the introduction of crypto hot wallet insurance were viewed as a manifestation of some entity’s trust in digital finance, that entity would be the syndicate called Atrium.

In fact, Atrium’s interest in blockchain technology can be traced back to at least 2016. The syndicate has been one of several London-based firms to back a research project seeking to understand “potential application of these technologies in wholesale insurance,” in the words of Atrium’s chief information officer, Justin Emrich.

While the bulk of the credit for creating the new crypto-focused liability policy goes to Atrium, there are several other syndicates backing the new product. All of them are members of Lloyd’s Product Innovation Facility — a project that claims to have over 100 million pounds in endowment and is designed to provide forward-thinking underwriters a playground to experiment with insurance products that address novel types of risks.

As Contelegraph reported, the present crypto incursion is not the first time a Lloyd’s-affiliated underwriter is offering risk protection to digital asset holders. In August 2018, the United States-based financial services provider Kingdom Trust secured insurance for its crypto custody platform. Although it was brokerage firm SDBIC that facilitated the deal, the identity of the underwriter remained unknown.

How it works

Naturally, insuring digital assets requires cooperation between those who specialize in underwriting risk and those who deal with cryptocurrency matters first-hand. The United Kingdom-based crypto security firm Coincover is responsible for the operational side of the new service. Upon request from Cointelegraph, the team behind the digital asset security platform shared some details of the theft cover solution.

The coverage protects the insured against losses sustained as a result of theft from their online wallet. Only users of pre-approved providers’ solutions are eligible to be covered, and currently only BitGo multisignature wallets qualify. Coincover will hold backup keys for protected accounts.

The policy protects users against a number of attack types, among them brute force, hacking, phishing scams, malware, insider attacks, device theft and criminal extortion. The event of an attack should be verified with local law enforcement authorities. However, it’s not hard to imagine the potential difficulties if a police unit proves uncooperative or unprepared to handle such an “exotic” crime.

Once the claim is approved, the insurance provider will aim to pay it out within 48 hours. The fiat value of the payout will be determined according to the coin’s price on coingecko.com at the time and date of theft.

Also, several common scenarios of coin loss are outside of the scope of coverage, including a willing yet mistaken transfer of cryptocurrency to a third party, or direct hardware loss or damage. The insurer will not protect against disruption or failure of the blockchain underlying the asset.

The price of coverage starts at 0.75% of the sum insured per year, and depends on the risk profile of the client and the level of cover required. The list of protected coins includes nine major currencies — Bitcoin, Ether, Bitcoin Cash, Bitcoin SV, Ripple, Stellar, Dash, ZCash and Litecoin — along with more than a hundred ERC-20 tokens.

Big picture

Going into 2020, cryptocurrency theft shows no signs of subsiding any time soon. According to a recent KPMG report, poor quality code and insufficient security measures were primary culprits in the theft of over $9.8 billion in cryptocurrency since 2017, prompting institutional investors to consider owning cryptocurrency a risky endeavor.

Related: Most Significant Hacks of 2019 — New Record of Twelve in One Year

The burgeoning custodial services sector is rapidly approaching levels of cold storage security that could match the expectations of financial institutions. However, the tradeoff is that digital funds physically stored in remote underground compounds are not always immediately available. Online wallets are much better suited for situations when quick liquidity is needed, and having reliable instruments to protect such hot holdings could provide traders with more flexibility.

Michael Collett, co-founder of digital asset management platform Stack, is not surprised by the panel of underwriters at Lloyd’s moving into the cryptocurrency space. He sees increasing enthusiasm for digital assets as a means of hedging against the ongoing volatility in traditional markets, prevalent among retail investors, high-net-worth individuals and institutional investors alike. Collett told Cointelegraph:

“As cryptocurrencies become increasingly popular, there will be growing demand for insurance that can protect digital assets on both an individual and institutional scale. While this product deals with individual investors’ non-custodial assets, there is little stopping the extension of this service offering — if it proves viable — to cover the cryptocurrency holdings of large financial institutions, ultra high net worth individuals, and pools of investors. This is a prudent move from Lloyd’s of London to slowly move into the cryptocurrency sector.”

Sharon Henley, head of product innovation at Coincover, shared an optimistic outlook with Cointelegraph. She observed that the growing popularity of the decentralized finance paradigm is associated with a demand for maintaining direct digital asset ownership backed by instruments that improve the security of such holdings. Coincover’s new insurance policy was developed with both individual and corporate investors in mind. Henley said:

“We are seeing demand across the spectrum, from crypto newbies, to exchanges, to asset managers. We can say that there is clear recognition from the insurance industry in general that assets will go digital and there is a great opportunity to bring in a level of security and protection to facilitate further widespread adoption. Ultimately, we feel insurance on digital assets will become baseline criteria for selecting your wallet or exchange service provider.”

Henley further believes that others in the insurance industry are looking at hot wallet protection as well, and similar products will not take long to emerge. Therefore, one thing seems certain: potential competitors, as well as the broader crypto community, will monitor the performance of Atrium and Coincover’s joint venture closely.

If the novel liability policy finds sufficient demand from individual investors, it could not only contribute to expanding the range of crypto-related insurance products on offer, but also encourage those still on the fence to finally buy into the vision behind digital currencies.