Most markets eventually develop some sort of insurance against loss, theft and damage. So far, however, Bitcoin has been different. This is because it presents a moral hazard to anyone buying insurance: It's easy to send the coins away to an address you control and claim they were stolen. Additionally, if Bitcoin balances could be insured, users would be less inclined to adequately protect them. Why encrypt your wallet when you can just get it replaced by your insurance company when it is stolen?
Most if not all insurance markets have some kind of moral hazard: Car insurance makes drivers less careful, home owner's insurance might make owners less likely to lock the doors, and health insurance encourages people to get more care than they really need, thus making it harder and more expensive for those who really need care to get it.
But most insurance markets have been able to partially address these problems. Car insurance companies raise rates and charge deductibles. Home owners insurance companies hold the homeowner responsible for loss and damage if they fail to lock doors and close windows. Health insurance companies use similar strategies as well.
The point is, most insurance companies are able to overcome moral hazards by making policy holders bear some of the risk and responsibility. But what about Bitcoin? If Merchant XYZ purchased insurance for their Bitcoin wallets, they could create a brain wallet, transfer funds to its address and claim they were stolen. Charging a deductible or raising rates would do no good. Sure, maybe you only reimburse Merchant XYZ for 50% of losses, but now they have 150% of what they did before. Raise their rates? They can always just drop insurance.
Eventually we will probably need some sort of insurance for businesses that hold large amounts of Bitcoin, but the very large moral hazards associated with such insurance will be difficult to overcome. How will insurance companies mitigate these hazards without making Bitcoin insurance useless to the honest merchant?
