(Kitco News) - The knock-on effects of the collapse of FTX continue to reverberate throughout the cryptocurrency ecosystem, with insurers being the latest group to reduce their business with cryptocurrency firms and traders who had exposure to the now-defunct exchange.
According to a report from Reuters, insurers were already reticent to underwrite assets as well as directors and officers (D&O) protection policies for crypto companies due to a lack of regulations and the volatile nature of the crypto market, and the downfall of FTX has intensified those concerns. D&O policies are typically used to pay legal costs but do not always pay out in cases of fraud.
As a result, specialists in the Lloyd's of London and Bermuda insurance markets are now requiring companies they work with to report on their exposure to FTX, and are using that information to potentially deny or limit coverage.
“The insurers are also proposing broad policy exclusions for any claims arising from the company's collapse,” the report from Reuters said. This means that many of the traders and exchanges exposed to FTX are now on the hook for any losses from hacks, theft, or lawsuits.
According to Ben Davis, digital assets lead at the Lloyd's of London broker Superscript, the company is now giving its clients a mandatory questionnaire demanding a detailed breakdown of their exposure to FTX.
"Let's say the client has 40% of their total assets at FTX that they can't access, that is either going to be a decline or we're going to put on an exclusion that limits cover for any claims arising out of their funds held on FTX," Davis said.
Multiple brokers indicated that the “exclusions denying payout for any claims arising out of the FTX bankruptcy are found in insurance policies that cover the protection of digital assets and for personal liabilities of directors and officers of companies that deal in crypto.”
Additionally, several insurers have been pushing for a broad exclusion of policies for anything related to FTX, the report said. These exclusions would serve as a failsafe for insurers and make it more difficult for companies to receive coverage.
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| Auditors ditch crypto firms amid scrutiny of FTX collapse |
The Bermuda-based crypto insurer Relm has adopted an even stricter approach according to the company’s co-founder Joe Ziolkowski, who said "If we have to include a crypto exclusion or a regulatory exclusion, we're just not going to offer the coverage."
Ziolkowski went on to highlight that one of the most pressing concerns now is “whether insurers will cover D&O policies at other companies that had dealings with FTX, given the problems facing the exchange's leadership.”
The FTX debacle is also likely to lead to higher insurance rates, especially in the U.S. D&O market, according to several insurers.
Due to the perceived risks and a lack of historical data on crypto insurance losses, the rates for crypto-related D&O services are already high. For example, a typical crime bond costs $30,000 to $40,000 per $1 million of coverage for a digital assets trader while it costs about $5,000 per $1 million for a traditional securities trader, according to Kyle Nichols, president of broker Hugh Wood Canada Ltd.
