Insurance companies are increasingly willing to offer errors and omissions (E&O) coverage to registered investment advisors (RIAs) who seek protection for claims arising from cryptocurrency investments, according to new data from Golsan Scruggs, a corporate insurance brokerage firm serving the financial services industry.
Premium costs for E&O coverage related to digital asset insurance have dropped by roughly half in the past year, highlighting a change in how insurers view the associated risks. Brian Francetich, shareholder and director of Golsan Scruggs, noted, "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. 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 decline in premium prices is attributed to two main factors: increased regulatory clarity and better asset custody practices. Greater oversight by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) has contributed to a more stable environment for digital assets. Additionally, insurance companies are more comfortable with the methods used to custody these assets.
Advisors themselves have also played a role. Francetich explained that while most financial advisors have been cautious, client demand has prompted the industry to conduct more due diligence. "Advisors are becoming more experienced in the asset class, and insurers have taken notice," he said.
However, the reduction in premiums comes with caveats. Coverage is more likely for portfolios where direct digital assets represent less than 10% of total assets under management. Additionally, not all crypto assets are treated equally; while bitcoin and ethereum exposure may be covered, other digital assets are often excluded.
Advisors seeking coverage should demonstrate a strict compliance program, including ADV disclosures and presenting a maximum allocation to digital assets for specific clients. Additional client disclosures acknowledging the risk and volatility of the space are also recommended.
Francetich emphasized the need for ongoing dialogue between RIAs and their insurance brokers, as the landscape surrounding digital assets continues to evolve rapidly. "RIAs in particular should be talking with their insurance broker more frequently about the landscape around crypto, since it changes so quickly," he advised. "What was true six months ago may not be true six months from now."
This significant shift in the insurance landscape signals a growing acceptance of digital assets within the financial advisory sector, presenting new opportunities and challenges for both advisors and insurers.
For more information, visit Golsan Scruggs.
