AM Best: Insurers begin to embrace crypto coverage, but market penetration lags

By Mia MacGregor

June 16 - (The Insurer) - Willingness among insurers to offer coverage for cryptocurrency is slowly growing, but market penetration remains minimal due to volatility concerns and a lack of actuarial data, according to a new report from AM Best.

Traditional insurers have historically shied away from covering crypto due to its non-traditional and intangible nature, extreme volatility and a lack of actuarial data or claims history to guide underwriting, AM Best explained.

Concerns about potential catastrophic losses and accumulation risk have also deterred insurers from entering the market, as they lack the experience and data to make informed predictions about price adequacy.

Despite these barriers, AM Best noted that insurer appetite is slowly growing.

Several Lloyd's syndicates, including those operated by Arch, Atrium, Beazley and Canopius, as well as traditional insurers including Axa, AIG and Chubb, have begun underwriting crypto risks. Brokers Marsh and Aon have expanded dedicated crypto insurance facilities, with Marsh recently launching an insurance facility for digital asset custodians, including financial institutions, with a capacity of up to $825 million.

However, insurance penetration in the crypto sector remains limited.

According to GlobalData's 2024 Emerging Trends Insurance Consumer survey, about 11% of global crypto holders have insurance coverage for their digital assets. AM Best suggested the actual figure might be lower, as many individual crypto holders value anonymity and avoid disclosing their assets.

The survey also revealed significant unmet demand, with approximately 42% of uninsured crypto holders willing to purchase coverage and an additional 26% open to considering it. AM Best noted that this substantial gap underscores the mismatch between demand and available market capacity.

The report suggested that insurance growth in the sector may be driven by increasing institutional engagement, greater regulatory clarity and the segment's modest base.

Crypto-focused specialists believe that increased regulatory clarity would facilitate risk assessment, potentially leading to standardised insurance product processes. Policy clarity from administrations could significantly boost demand for crypto insurance products, especially custody-related coverages.

However, AM Best cautioned that no insurer has publicly quantified how much and how quickly insurance demand might rise due to these policies.

Additionally, market crises have spurred improvements and adaptations in how crypto insurance is structured.

Following the FTX collapse and other exchange failures, AM Best noted that insurers and brokers have pushed for better risk differentiation and mitigation.

Post FTX, underwriters increased scrutiny on the quality of an exchange's internal controls, reserve practices and regulatory compliance. Underwriters are evolving in assessing crypto risk, looking for sound governance and audited financials, and being aware of risky exposures, the report stated.

Conversely, AM Best noted that the insurance market faces challenges during periods of rapid price appreciation or positive market sentiment.

When crypto prices rise, the insured value of assets under custody can skyrocket, potentially leaving clients underinsured if policy limits aren't adjusted. The report stated that insurers are beginning to develop solutions, possibly using floating limits or frequent endorsements to maintain adequate coverage.