What is Cryptocurrency Insurance?
Cryptocurrency insurance is a way for users to protect and recover financial losses if digital currencies, such as Bitcoin and Ether, are lost or stolen.
This form of insurance provides protection against risks arising from exchange hacks, theft, or security breaches. Since traditional insurance typically does not cover cryptocurrencies, users need to take additional precautions to protect their assets.
In the event that cryptocurrencies are lost due to a security breach, cyber attack, or smart contract-related incident, crypto insurance will help owners recover the lost funds.
So who is responsible for this protection? Similar to traditional insurance, insurance companies or underwriters provide the insurance service. On the customer side, they become the insured party and receive the benefits of this protection.
Insurance specifically for assets like Bitcoin and Ether helps mitigate risks in digital asset management, providing protection for individuals, businesses, and institutional investors against potential losses.
Like traditional insurance, this form of insurance is funded through premiums – payments the insured party makes to receive protection benefits. These premiums will be put into a compensation fund, which automatically reimburses users for damages if an incident occurs.
Typically, digital asset insurance policies focus on protecting organizations. Individual users are only covered if the damage is directly caused by a company’s infrastructure failure, such as the theft of private keys during service operations.
How Cryptocurrency Insurance Works
Cryptocurrency insurance includes steps such as risk assessment, insurance plan design, premium calculation, contract signing, and compensation when loss occurs.
This type of insurance is designed to address the unique risks associated with digital assets. Here’s how crypto insurance works:
Risk Assessment: Insurance providers determine the level of risk when insuring you by considering the value of your digital assets, security measures, trading habits, and your level of regulatory compliance.
Insurance Plan Design: Based on the assessment results, the insurance provider will build a customized crypto insurance plan, specifying the coverage for potential losses.
Insurance premium calculation: Insurance premiums are determined based on many factors such as market conditions, history of cyber attacks, property value, insurance limits and existing security measures.
Signing the contract: Both parties sign the contract, which clearly states the terms and conditions of the insurance. The customer commits to paying the insurance premium on time, and the insurance company commits to compensate if an incident occurs.
Claim: When a loss occurs, the customer notifies the insurance provider and provides the necessary documents. After verifying the information, the insurance company will pay the compensation according to the signed agreement.
Types of Cryptocurrency Insurance and Coverage
Depending on the scope, crypto insurance can cover losses caused by exchange hacks, smart contract failures, or theft from personal wallets.
The crypto insurance industry is still evolving and new types of insurance may emerge to meet different needs. Here are some common types of insurance:
Exchange Insurance: Protects exchanges against losses due to technical failures, theft, fraud or cyber attacks.
Custody Insurance: Protects institutions holding digital assets for customers against losses.
Smart Contract Insurance: Compensates developers if smart contract code fails or malfunctions.
Decentralized Financial Insurance (DeFi): Apply self-executing smart contracts, eliminating human intervention in the compensation decision process.
Crime Insurance: Protects projects from risks arising from criminal activities such as theft, fraud and employee misconduct involving crypto assets.
Directors and Officers Insurance: Protects company directors and officers against personal risk in lawsuits related to their decisions or actions, such as improper use of crypto assets.
Shipping Insurance: This insurance covers losses incurred during the movement of mining equipment or other cryptocurrency hardware.
Storage Insurance: Provides protection for digital assets stored online or offline.
Each insurance provider has different rules and exclusions, so users need to carefully review the insurance contract before choosing.
Comparing Traditional Insurance and Cryptocurrency Insurance
Traditional insurance focuses on protecting physical assets and liabilities, while crypto insurance is geared towards protecting digital assets and blockchain-related risks.
As expected, cryptocurrency fraud insurance will take time to catch up with the long-established claims processing procedures of traditional insurance. The cryptocurrency insurance market is still in its early stages of development.
Cryptocurrency insurance is currently much less common than traditional insurance. Swiss Re estimates that global insurance penetration will be around 6.5% by 2023–2024. Meanwhile, the crypto insurance market is still nascent and changing rapidly. According to Chicago-based crypto insurer Evertas, only 1% of the $1.2 trillion market value of cryptocurrencies will be insured as of May 2023.
Below is a comparison table between traditional insurance and crypto insurance:
Features Traditional Insurance Cryptocurrency Insurance Coverage Wide range of risks (life, health, property, etc.) Mainly custody and smart contract risks Target customers Individuals, businesses, institutions Cryptocurrency exchanges, custodians, investors Service providers Individuals, businesses, institutions Specialized insurers and brokers Challenges Dealing with online changes, fraud Rapid price fluctuations, unclear regulations, security risks Legal regulations Established market with clear rules New market with changing regulations
Featured Cryptocurrency Insurance Companies
Nexus Mutual
How it works: Decentralized insurance fund, operating through smart contracts on the blockchain. Investors use NXM tokens to participate and vote on contracts or wallets they want to insure.
Coverage: Nexus Mutual focuses on insuring against risks related to smart contract failures and other technological failures on the blockchain. Claims will be paid automatically through smart contracts when eligible.
Evertas
Coverage: The first company focused on blockchain and cryptocurrency insurance. Evertas insures organizations against cyberattacks, lost private keys, and technical issues such as smart contract bugs and exchange system failures.
Main clients: Exchanges and blockchain platforms, helping to protect their assets against potential security and technology-related losses.
Etherisc
Features: A decentralized insurance platform on Ethereum, allowing developers to build new insurance products. Etherisc has developed many products such as wallet insurance, insurance for crypto loans, and insurance for agriculture.
Financial model: Users can invest in insurance funds to earn interest on their investment and participate in the claim processing process.
Coincover
Specialty: Securing cryptocurrency exchanges and wallets with offline storage and insurance solutions. Coincover ensures that in the event of a security incident, 100% of user assets will be returned.
Additional Services: Provide additional private key insurance options for customers of partner exchanges such as “protected by Coincover” marking for added reliability.
Any
Role: One of the traditional insurance companies entering the cryptocurrency space. Aon provides insurance to exchanges like Shakepay in Canada, helping customers get compensation in the event of an exchange being hacked or experiencing a security incident.
Special: In addition to exchange insurance, Aon also provides specialized risk management solutions for blockchain companies and cryptocurrency mining projects.
The Future of Crypto Insurance
The demand for cryptocurrency insurance will continue to grow as more people enter the market. This trend is likely to attract large insurance companies that want to tap into the potential of this new market.
However, the future of crypto insurance remains uncertain. While the market promises strong growth due to the growing popularity of cryptocurrencies, the industry also faces many challenges, including regulatory uncertainty, high market volatility, and the need for robust security measures.
In the coming years, major insurance companies may enter the market and begin to offer insurance services for digital assets. As the cryptocurrency market expands, more specialized insurance providers will emerge, focusing on areas such as personal wallet protection, smart contract insurance, and cybercrime. This will require crypto companies to comply with emerging regulations and develop innovative insurance policies.
Growing awareness and understanding of crypto insurance will drive demand and market adoption. New technologies such as artificial intelligence (AI) will play a key role in improving risk assessment and fraud detection. The future of crypto insurance depends on the industry’s ability to innovate and adapt to new regulations and technologies such as AI.
