Cyber insuranceInsurance industry wary about insuring Bitcoin companies, transactions

Consumers worldwide are engaging in 100,000 financial transactions every day using Bitcoins. The growing use of the 6-year old digital currency and its implications for the insurance industry were the subjects of a panel discussion at last week’s Risk and Insurance Management Society (RIMS) 2015 Conference in New Orleans.

In the “Bitcoins: the Next Cyberinsurance,” session, Ty Sagalow, CEO and founder of Innovation Insurance Group, said he understands the level of skepticism around the use of Bitcoins given the “shady” nature of the currency’s startup. “Many carriers remember that when Bitcoin began in 2009, it was first used for the purpose of buying any type of drug you could think of, or to pay for murder for hire — some really bad stuff,” he told Insurance Journal.

The currency has moved beyond its secretive past and has been embraced by tech firms who are interested in it from a technological perspective and for its investment potential. Venture capital companies have invested more than $670 million worth of Bitcoins into security-related companies. An estimated $3.5 billion worth of Bitcoins are in circulation, 82,000 merchants now accept the currency, and eight million users have set up Bitcoin “wallets” in which they store and manage the currency. As of Monday one bitcoin is worth about $240 U.S. dollars.

In addition to its launch being linked to the illegal drug trade, insurers considering protecting Bitcoin users have other concerns, said Robert Parisi, managing director and national Cyber Risk Product Leader at Marsh in New York. First, “Bitcoin has some volatility, so you can’t have the same approach to storing it as you would a commodity,” he said, adding that Bitcoin has a certain “perishable” quality. “Volatility in price is one of the things carriers are concerned about,” Parisi said. An appreciation in price can be beneficial to an owner, but trying to understand exactly how a Bitcoin is created and what causes its price movements “is a very complex problem” for insurers.

Bitcoins held by an individual or business are stored in a virtual wallet, where the currency can only be removed or accessed through the use of two codes, one held by the Bitcoins’ owner and the other held publicly. “A person could lose the thumb drive that has the private key on it, then they are no longer able to unlock their Bitcoin wallet,” Parisi warned.

As a digital currency, Bitcoin is vulnerable to cyber theft. James Kirtland, vice president of corporate risk management for Voya Financial Inc., said that cybersecurity has been a concern among many insurers considering policies that cover Bitcoins. “Insurance companies are definitely looking at it,” he said, noting that it is reminiscent of the dawn of cybersecurity, when “everybody looked to their general liability policies to cover it, but the policies didn’t cover it.”

At the Bitcoin session last week, Sagalow made a distinction between insuring Bitcoins’ value and covering the management of a Bitcoin company. The price of the currency cannot be insured, he said, but the company could be covered “like any other D&O (directors and officers) insurance.” Bitcoin theft insurance is also available. “It’s pricey and there are only a few policies, but over time more folks will get involved and there will be more consistency in the security of the underwriting,” Sagalow predicted.

The global appeal of Bitcoins is growing. A majority of people in the world do not have bank accounts or credit cards, but many of them do have smart phones, making Bitcoin a reliable currency for them. “I honestly believe that Bitcoin is the cutting edge of where monetary systems may be going,” Kirtland said. “The biggest hurdle we have is, we don’t know enough about it,” he said.