Last week, the Professional Liability Underwriting Society (PLUS) held its annual Directors and Officers (D&O) insurance symposium, which brings together key players and thought-leaders in the insurance industry to discuss leading issues impacting the D&O insurance marketplace. The symposium included excellent panel discussions on emerging trends and significant insurance issues, including the current state of the insurance marketplace, new exposures created by the rise of cryptocurrency and blockchain technology, and even a panel on risk management when it comes to the “Dark Web.”
Although each of these panels discussed important insurance issues, I was naturally enthralled with the panel on cryptocurrency and blockchain technology, appropriately named “Crypto Insurance Challenge: How Can I Insure What I Don’t Understand?” During the presentation, it became apparent that many in the insurance industry are quite skeptical of cryptocurrency and blockchain technology or don’t quite yet understand them, whereas the panel itself was generally bullish on their prospects and potential uses.
According to certain members of the panel, insurers have taken notice of cryptocurrencies and recognized that the financial infrastructure is in place to place these risks and do further market education. From an underwriting perspective, however, the major concern continues to be legal and regulatory uncertainty, and this has led to an area of the D&O insurance marketplace that remains largely underinsured.
For example, there has been a substantial increase in cryptocurrency regulatory guidance, enforcement actions and private litigation. For directors and officers, Initial Coin Offerings (ICO) present a unique and uncertain risk, and the SEC has increasingly taken the position that ICOs are securities subject to the SEC’s jurisdiction, and, therefore, that issuers will need to be appropriately registered, make periodic disclosures, and be exposed to SEC regulatory actions and private securities actions. By the same token (yes, that’s a pun), allegations of fraud stemming from information (or lack thereof) disclosed to investors also presents a significant risk and an insurance uncertainty. While market participants will likely turn to D&O insurance to cover these types of exposure, the market for such insurance remains quite limited.
Another underwriting concern remains market education, identifying potential insurance pitfalls (such as the uncertain regulatory landscape), and distinguishing different types of risks. For example, cryptocurrency exchanges – which allow customers to trade cryptocurrencies – remain under intense regulatory scrutiny compared to many other types of cryptocurrency-related businesses, especially given the potential anonymity surrounding each transaction and the view that these types of exchanges are easy targets for regulation and potential enforcement actions.
Although some of the regulatory uncertainty in the United States is starting to subside, the various features of cryptocurrencies and blockchain technology raise additional, unanswered questions that may lead to further legal and regulatory guidance. For businesses using cryptocurrency or blockchain technology, it is critical to understand the insurance marketplace, the new exposures created by this widely misunderstood asset class and technology, and that a healthy insurance market is instrumental to its success. For now, however, it appears as if adequate coverage will remain difficult to obtain, at least until the legal and regulatory uncertainty declines.