Why Bitcoin Businesses Struggle to Get Insurance

As early as the 2nd century BCE, Babylonian traders insured goods from loss at sea by paying a premium on loans. If they paid a little extra when they borrowed, the debt would be forgiven if a freak wave swallowed their cargo en route to market, or if pirates attacked their ships.

The bitcoin economy is drastically different, but the need to insure against theft or accidental loss remains. Recovering lost bitcoin is as impossible today as raising ships from the floor of the Mediterranean would have been for the Babylonians thousands of years ago.

Fulfilling that need is a different story, as to date, insurance companies have been hesitant to establish relationships with bitcoin businesses.

Lack of understanding

As CoinDesk reported last week, Lloyd’s, which was the first insurance company to protect a bitcoin storage service, was involved with bitcoin for a matter of weeks before its relationship with Elliptic Vault ended for reasons that are still unclear.

"Insurance companies do not understand [bitcoin], and even fear it," Xapo CEO Wences Casares told CoinDesk.

Xapo is one of the few insured bitcoin companies at moment, with coverage provided by Bermuda-based company Meridian Insurance. The California-based company's policy is "much larger than $15m", according to Xapo's senior vice president of business development Ted Rogers, and part of the reserve is held in bitcoin.

"For many [insurers], the technical risks are difficult to assess and understand – much less price," said Casares.

The challenge for Xapo was to persuade the insurers that they had reduced the risk of loss by implementing strong security standards, said Casares, adding:

"We could not have this insurance if we had not made the investment we have made in the deep cold storage, multi-signature [wallets] and physical vaults."

Getting insured isn’t a walk in the park, agreed Circle CEO Jeremy Allaire, who announced at the Bitcoin2014 conference that Circle’s accounts would be fully insured by an unnamed insurer which is "top rated from an SMP ratings perspective".

"[Insurance is] another expense, it's another level of accountability and audit, it's a major undertaking," Allaire told CoinDesk:

"My understanding is that there have been quite a few companies that have, through brokers and others, pitched and have been unsuccessful in getting underwriting. And so I think that the bar is very high on what underwriters will look for from companies."

Sceptical climate

The difficulty bitcoin businesses face when obtaining insurance is just part of the industry's wider struggling to normalize its affairs despite an atmosphere of scepticism.

The industry has faced similar problems when it comes to building relationships with banks and regulators, with the Financial Conduct Authority in the UK, for example, refusing to issue any guidance on bitcoin.

Combined with a non-existent or immature system of auditing for bitcoin-holding businesses, and it’s easy to see why insurance companies have been less than forthcoming with the industry.

Looking ahead

According to Allaire, insurance companies, while hesitant, are testing the waters at the moment.

"Given the perceived higher risk a lot of these firms are keeping the [bitcoin] client base to a very small number and what they perceive to be high-quality operations – they want to learn the market and they want to do that in a controlled manner."

One example of this approach is Great American Insurance Group, which announced last week that it will begin courting bitcoin businesses, first with a more narrow product offering aimed at crime and theft. Alhough, it isn't difficult to foresee its offerings expanding.

As the bitcoin ecosystem matures and becomes less of an exotic market for insurance companies, insured bitcoin companies will be the standard, just like mainstream financial companies.

"It is a matter of time," said Casares.

Until then, bitcoin largely remains the all-or-nothing investment it always has been. For die-hards, that might be part of the appeal. For mainstream customers, it is a big turnoff.

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