New Data from Golsan Scruggs Shows Insurance Carriers Becoming More Comfortable Offering Coverage to Financial Advisors for Digital Assets E&O premiums for advisors managing cryptocurrencies have fallen by roughly half in just the past year, according to a survey of key insurance carriers.
LAKE OSWEGO, Ore.
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June 13, 2024 09:00 AM Eastern Daylight Time
Insurance companies are more willing to offer errors and omissions coverage to registered investment advisors (RIAs) who seek protection for claims arising from cryptocurrency investments, as noted by a steep drop in premium costs, according to proprietary data from Golsan Scruggs, the corporate insurance brokerage firm serving the financial services industry.
Typically, the best barometer of how insurers view risk, premiums for E&O coverage related to digital asset insurance have dropped by roughly half in just a year.
“About a year ago, advisors who wanted to add cryptocurrencies to their clients’ portfolios often had to do so without the protection of insurance, since premiums were often prohibitive, assuming they could even find coverage,” said Brian Francetich, shareholder and director of Golsan Scruggs. “The environment has changed dramatically, and now RIAs can better mitigate their own risks if they feel their clients could benefit from increased exposure to the asset class.”
The drop in premium prices is driven by two primary factors. First, insurance companies believe that the regulatory environment is becoming clearer, with greater oversight from both the Securities and Exchange Commission and the Financial Industry Regulatory Authority, which regulate advisors’ use and communications around cryptocurrencies. Second, insurance companies are more comfortable with how these assets are custodied.
A third factor is advisors themselves.
“Most financial advisors have been cautious about adding cryptocurrencies, but it is clear that client demand has prompted the industry to do more diligence,” Francetich said. “Advisors are becoming more experienced in the asset class, and insurers have taken notice.”
Price drops come with some caveats. Insurance companies are more likely to offer coverage for portfolios where direct digital assets represent less than 10% of total assets under management. Also, not all crypto assets are treated alike. While areas like bitcoin and ethereum exposure are covered, other digital assets are often excluded.
Advisors seeking coverage should also demonstrate a strict compliance program surrounding these assets, including ADV disclosures, as well as presenting a general maximum allocation to digital assets for specific clients and not rolling it out to all clients regardless of risk tolerance. Advisors should also consider additional client disclosures where clients acknowledge the risk and volatility within the space.
Advisors must be prepared for a continued evolution in insurers’ thinking around digital assets in general.
“RIAs in particular should be talking with their insurance broker more frequently about the landscape around crypto, since it changes so quickly,” Francetich said. “What was true six months ago may not be true six months from now.”
ABOUT GOLSAN SCRUGGS
Golsan Scruggs is a corporate insurance brokerage firm serving the financial services industry. Our specialists operate throughout the United States and specialize in registered investment advisor (RIA), private equity/hedge fund, and mutual fund professional liability errors & omissions (E&O) insurance. As one of the largest insurers of RIA firms in the U.S., Golsan Scruggs employs a dedicated staff that understands the special risks of the financial services industry to achieve superior results, making the underwriting process painless.
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