[na85]

Contemporary insurance schemes usually rely on the insurer having some means (or some chance) of possibly recovering the sum, either by siccing their lawyers on the thief/thief's bank or getting the police to step in.

With bitcoin there's really no viable way to do this as there's no easy way for a sub-NSA-level actor to trace BTC transactions.

So I'm at a loss as to how such a system could be made to work.

[wikwocket]

I don't think this is true for many types of insurance. In many cases, insurance companies can "go after" a perpetrator, like in car accidents and credit card fraud situations, but what about home insurance that covers fire/flood/acts of God? What about life insurance or health insurance?

In these cases I am pretty sure the insurers make their living by shrewd actuarial rate-setting that tries to make their "average" policy profitable, and by having a large enough customer base that the "average" case is statistically likely.

The way to make BTC insurance work would be similar: calculate the costs to replace BTC, times the likelihood of needing to, and charge more than that.