Bitcoins: The Next Cyberinsurance Risk?

By | April 30, 2015

Consumers around the world are racking up more than 100,000 financial transactions every day without using cash, credit cards or a barter system, How are all those buyers doing it?

With Bitcoins, of course.

The growing use of the six-year-old virtual currency and its implications for the insurance industry were the subjects of a panel discussion at the Risk and Insurance Management Society (RIMS) 2015 Conference in New Orleans this week.

In a session entitled, “Bitcoins: the Next Cyberinsurance,” Ty Sagalow, CEO and founder of Innovation Insurance Group, said it’s no surprise that the use of Bitcoins still raises eyebrows among skeptics, given the “shady” nature of the currency’s startup.

Dark Origins

“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 says.

But Sagalow said the currency has moved away from its dark past and has been embraced by Silicon Valley-funded corporations who are interested in it from a technological standpoint as well as its investment potential.

With an estimated $3.5 billion worth of Bitcoins in circulation, 82,000 merchants now accept Bitcoins, Sagalow said. Eight million users have set up Bitcoin “wallets” – accounts where they “store” and manage the currency – and the number is growing.

Bitcoins are a way of using and moving money without a bank account or credit card. The currency fluctuates in value against other currencies, just as the U.S. dollar and many others do. Recently, a Bitcoin was worth about $226 in U.S. dollars, Sagalow said.

Users can purchase Bitcoins, store them in a virtual wallet linked to their smart phone, and then scan their account information at participating establishments to pay for merchandise or for other purposes.

Insurer Concerns

Along with a rocky startup linked to the illegal drug trade, insurers that consider the possibilities of protecting Bitcoin users have other lingering concerns, said Robert Parisi, managing director and national Cyber Risk Product Leader at Marsh in New York.

For one thing, “Bitcoin has some volatility, so you can’t have the same approach to storing it as you would a commodity,” he said, adding that the currency has a certain “perishable” quality.

“Volatility in price is one of the things carriers are concerned about,” Parisi said. An upward move 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.

In addition, the security of Bitcoin use is still untested in the larger market.

Bitcoins held by an individual or business are protected in much the same way a safe deposit box at a bank secures valuables. Once stored in a virtual wallet, the currency can only be removed or accessed through the use of two “keys” – or 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.

Robust Investment

Still, investment in Bitcoins has been relatively robust. Sagalow said the growth in investment so far in the short life of the currency has been stronger than the growth of Internet-related investment during a similar period in its startup.

Venture capital companies have invested more then $670 million worth of Bitcoins into security-related enterprises, he added.

Cyber Issue

James Kirtland, vice president of corporate risk management for Voya Financial Inc., said that so far, insurers have viewed Bitcoin use as a cyber security issue.

“Insurance companies are definitely looking at it,” he said, noting that it is reminiscent of the dawn of cyber security, when “everybody looked to their general liability policies to cover it, but the policies didn’t cover it. ”

So now, carriers are looking for new options. “There really is no product for it yet,” Parisi said.

Sagalow made a distinction, however, 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.”

In addition, Bitcoin theft insurance is available. “It’s pricy 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.

Parisi says an interesting aspect of Bitcoins is the anonymity of users. While every Bitcoin transaction is digitally recorded, parties to the transactions are identified only by account numbers, not names. The anonymity seems to be part of Bitcoins’ appeal for many users.

But Parisi points out that any transaction that is done via email leaves an electronic “track” that can be followed back to the user, so the anonymity is hardly complete.

Still, noting that the vast majority of people in the world do not have bank accounts or credit cards, but many of them do have smart phones, the panelists said Bitcoins could become a simple and reliable currency for millions of people.

“I honestly believe that Bitcoin is the cutting edge of where monetary systems may be going,” Kirtland said, though he did not suggest that would happen overnight.

“The biggest hurdle we have is, we don’t know enough about it,” he said.

Regulated exchanges for the currency now exist, but the full regulatory aspects of Bitcoin use are yet to be explored, and that will involve myriad state and federal agencies, the panelists said.

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