Insurance companies are increasingly willing to extend errors and omissions (E&O) coverage to registered investment advisors (RIAs) for claims arising from cryptocurrency investments, according to new proprietary data from Golsan Scruggs, a corporate insurance brokerage firm that serves the financial services industry.
Premium costs for E&O coverage related to digital asset insurance have seen a steep decline, dropping by approximately half within the last year. This decline in premiums is typically a strong indicator of how insurers assess risk.
"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," stated 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."
Several factors are driving this reduction in premium prices. Firstly, insurance companies believe that the regulatory environment is becoming clearer, thanks to increased oversight from both the Securities and Exchange Commission and the Financial Industry Regulatory Authority. These bodies regulate advisors' use and communications around cryptocurrencies. Secondly, there is greater comfort among insurers regarding how these assets are custodied.
A third factor influencing the change is the 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 noted. "Advisors are becoming more experienced in the asset class, and insurers have taken notice."
However, the price drops do come with certain caveats. Insurance companies are more likely to offer coverage for portfolios where direct digital assets represent less than 10% of total assets under management. Additionally, not all crypto assets are treated equally. While exposure to bitcoin and ethereum is generally covered, other digital assets are often excluded.
Advisors seeking coverage need to demonstrate strict compliance programs surrounding these assets. This includes ADV disclosures and presenting a general maximum allocation to digital assets for specific clients, rather than rolling it out to all clients regardless of their 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. "RIAs in particular should be talking with their insurance broker more frequently about the landscape around crypto, since it changes so quickly," Francetich advised. "What was true six months ago may not be true six months from now."
Golsan Scruggs is a corporate insurance brokerage firm serving the financial services industry. They 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., they employ a dedicated staff that understands the special risks of the financial services industry, making the underwriting process seamless.
For more details, visit the company website at https://golsanscruggs.com/. View the source version of the news on newsdirect.com.
