Crypto Fund D&O – Why is it so expensive?
If you’re a crypto-based investment fund or hedge fund and you’ve been shopping for D&O Insurance you’ve probably been hit with sticker shock.
Why do D&O and E&O Insurance for Crypto Funds cost so much?
What’s driving the price for insurance on Crypto and Defi?
And most importantly what can you do about it and find the best deal?
If you’re in the crypto hedge fund space and have been shopping for investment manager insurance – a form of Directors & Officers or D&O insurance combined with Errors & Omissions or E&O Insurance you may be shocked at the pricing for coverage.
Crypto-based funds or funds with crypto exposure are seeing the combination of very few insurers playing in their space and high premiums compared to other classes of asset managers.
There are a few reasons which explain what may seem like price gouging:
First, the D&O marketplace for all asset managers as well as private and public companies outside of the financial services world has been disrupted for the past several years.
Prices are elevated due to poor claims experience in the past and growing litigation in D&O.
Overall there is limited capacity in the D&O market which drives up pricing.
Compounding the capacity issue is the fact that reinsurance companies – the marketplace where insurance companies go to purchase insurance and spread their risk – are generally conservative and are not accepting crypto exposures from their buyers.
This means that primary insurers who you buy insurance from cannot spread their risks outside of their balance sheets, which is a risky proposition.
The second is uncertainty. Crypto and Defi lack historical track records, unlike other asset classes which have long known histories.
So there’s a degree of uncertainty about what may happen in terms of future litigation.
Uncertainty is not good in the minds of underwriters so they hedge their bets by offering limited capacity at high rates.
Third. Underwriters perceive Crypto and Defi as high risk so they price them accordingly to their perception.
Fourth – fewer players.
With a high degree of uncertainty, lack of reinsurance to spread risk, and the potential for high claims many traditional underwriters/insurers choose to not even look at crypto funds so which leaves only a handful of global insurers that will engage in these types of funds.
It’s a basic supply and demand problem – there’s a reduced supply and increasing demand as more funds startup in the crypto defi space so prices rise.
Okay, so I’ve painted a pretty bleak picture, what can be done about it?
My first suggestion is to work with a skilled broker who can access all of the underwriters in this space.
Combined with that is to not shotgun your applications out to more than one broker.
Thinking the more brokers you have working on your account the better is actually contrary to best practices.
As I mentioned earlier, there are a limited number of insurers underwriting crypto and defi accounts.
Having more than one broker trying to get to these underwriters only causes massive and unnecessary confusion and lessens your negotiation power, and leads to poor results.
Part of our process is to engage all underwriters in the domestic, London, and Bermuda markets, and host an underwriting call with interested underwriters and a client’s management team.
This call helps you highlight your fund and give underwriters the opportunity to ask questions not found on application forms and get comfortable with your process and controls.
It also gets underwriters’ attention and interest in offering proposals. It’s an important point of differentiation.
To that end, we also recommend providing robust details on applications, documents, and requested information.
Don’t think of information requests as a big pain in the butt – instead, think of it as an opportunity to differentiate.
Finally, I recommend being careful of non-rated startup insurers in the space.
There are several insur-tech firms marketing themselves to crypto/defi firms for D&O which is concerning.
D&O insurance is a long-tailed insurance product intended to protect your firm’s decision-makers and their personal net worth from damaging and expensive lawsuits.
Does it make sense to go cheap here?
I think it makes sense to work with insurers that have strong balance sheets, are rated and recognized by the major independent rating agencies, and can weather blistering claims down the road.
Finally, be patient.
Most of our deals are underwritten and priced in about two weeks from the time we submit applications to the market, but some do take a bit longer.
Hang in there and be patient so we can do the best job for you.
Wrapping up, I hope that gave you some answers on why D&O insurance in the crypto fund business is so expensive and how to deal with it.
If you’re looking for that skilled broker I mentioned earlier, let’s chat. If you’re early in the thought process of starting a fund, that’s fine.
If you’re up and running and need insurance, that’s fine too.
Finally, if I didn’t answer a question you have in mind regarding crypto and defi, let me know.
You can comment below, or drop me an email.