Insurers stay away from FTX-linked crypto companies as infection risk increases

FTX: Exclusions can act as a safety precaution for insurers. (File)

Some market participants say insurers are denying or restricting coverage to customers exposed to bankrupt crypto exchange FTX, leaving crypto traders and traders Numbers are not covered for any loss due to hacking, theft or litigation.

Insurers have been reluctant to implement asset and director and employee (D&O) protection policies for crypto companies because of meager market regulation and the price of Bitcoin and other cryptocurrencies. unstable.

Now, the crash of FTX last month has raised concerns.

Lloyd’s of London and Bermuda insurance market experts are asking crypto companies to be more transparent about their exposure to FTX. Insurers are also proposing broad exclusion policies for any claims arising from a company’s demise.

Kyle Nichols, president of brokerage Hugh Wood Canada Ltd, said insurers are asking customers to fill out questionnaires asking if they invest in FTX or have assets on the exchange. .

Ben Davis, head of digital assets at Superscript, said Lloyd’s of London broker Superscript is offering clients who have traded with FTX a required questionnaire to outline percentages. their level of exposure.

“Assuming a client has 40% of their total assets at FTX that they cannot access, that would be a drop or we would introduce a limited exclusion of any claims arising from their funds being held on FTX,” he said.

Exclusions for refusing to pay for any claims arising from the FTX bankruptcy are found in the insurance policies that protect digital assets and the personal liability of the directors and officers of the companies. crypto trading firm, five insurance sources told Reuters. One broker said some insurers have pushed for a broad exclusion of policies for anything related to FTX.

Insurers and brokers say the exclusion could act as a safe-haven for insurers and would make it more difficult for companies seeking coverage.

Relm, the Bermuda-based crypto insurer that previously provided coverage to FTX-linked entities, has adopted an even more rigorous approach.

“If we had to include a crypto exclusion or a regulatory exclusion, we wouldn’t provide coverage,” said Joe Ziolkowski, co-founder of Relm.

QUESTIONS D&O

Now, one of the most pressing questions is whether insurance companies will cover D&O policies at other companies that deal with FTX, given the issues the exchange’s management has faced. face, Ziolkowski said.

U.S. prosecutors say former FTX CEO Sam Bankman-Fried participated in a scheme to defraud FTX customers by misappropriating their deposits to pay expenses and debts and invests on behalf of his crypto hedge fund, Alameda Research LLC.

An attorney for Bankman-Fried on Tuesday said his client is considering all of his legal options.

The D&O policy, which is used to pay for legal fees, does not always cover fraud cases.

Insurance sources will not name their clients or potential customers who may be affected by the policy changes, citing security reasons. Cryptocurrency companies with financial exposure to FTX include Binance, a cryptocurrency exchange, and Genesis, a crypto lender, both of which did not respond to emails seeking comment.

Although the least risky parts of the crypto market, such as companies with cold wallets that store assets on platforms not connected to the internet, can be insured up to 1 billion dollars, but D&O policyholder coverage can currently be limited to tens of millions of dollars. dollars for the rest of the market, Ziolkowski said.

Insurers say the collapse of FTX could also lead to an increase in insurance rates, particularly in the US D&O market. Rates are already high due to perceived risk and lack of historical data on crypto insurance losses.

A typical crime bond — used to protect against losses caused by crime — will cost between $30,000 and $40,000 per $1 million in insurance for a financial trader. digital product. That compares to a cost of about $5,000 per $1 million for a traditional stock trader, said Hugh Wood Canada’s Nichols.

(Except for the title, this story has not been edited by NDTV staff and is published from an aggregated feed.)