The cyber (re)insurance market is at a crucial phase in its development, with buyers increasingly calling for innovative and comprehensive products to better account for the way cyber risks cut across every aspect of business today.
Carriers are being held back from providing these solutions by concerns around un-quantified cyber exposures potentially buried in traditional policies.
JLT believes more resilience to cyber risk in the (re)insurance market can be created by considering cyber as a standalone line of business rather than a peril
This shift will benefit insurance buyers in the form of greater certainty, expertise, capacity and stability from the (re)insurance market in a complex and growing risk area.
Commenting on the report, David Flandro, Global Head of Analytics, JLT Re said, “Cyber exposures have grown considerably for companies of all sizes and domiciles in recent years, causing business costs to rise sharply.
Companies face challenges in understanding their exposures and the type of insurance cover needed as the underlying drivers of cyber risks frequently change, requiring insurers and brokers to explain and quantify these exposures as clearly as possible. Increased coordination and collaboration between key markets will be crucial in meeting evolving demands and unlocking the huge potential associated with cyber for the benefit of companies and carriers alike.”
Sarah Stephens, Head of Cyber, Technology and Media E&O, JLT said, “Insurance solutions for cyber risk can differ considerably from one company to the next, reflecting the view that cyber can either be considered a peril that falls within traditional P&C products or a line of coverage in its own right. But, in order to address buyers’ changing needs, we see the standalone market as best placed to facilitate innovative and comprehensive solutions for future cyber risks. As more premiums flow into the standalone market, carriers will be able to evaluate and price risks more accurately as good-quality claims data and sophisticated modelling tools become increasingly accessible. This, in turn, will help ensure the market is better placed to trade through future systemic losses by encouraging innovative reinsurance and insurance-linked securities (ILS) structures. Governmental support is also likely to be needed in back-stopping some of the more catastrophic loss scenarios.”
Sarah Stephens, continues, “A more robust cyber market, with comprehensive, standalone policies at its core, would also help eliminate the risk of silent exposures and, ultimately, make the market more resilient to future catastrophic cyber losses. Given the strong likelihood of a major cyber event in future, the market needs to prevent a situation where (re)insurance buyers are faced with a dearth of capacity as was the case for terror cover in the aftermath of the 9/11 attacks.”
Given the complexity of the risks, access to reinsurance capital is essential in alleviating the primary market’s aggregation burden and supporting the innovative cover needed for future cyber risks.
Chris Bennett, Partner, London Market & International Non Marine, Cyber Treaty, JLT Re said, “There is sufficient reinsurance capacity for the current cyber insurance market and increased reinsurer appetite for cyber risk bodes well for long-term growth prospects. New approaches have emerged in recent years as competition between reinsurance companies has stiffened, making non-proportional structures such as excess-of-loss, stop-loss and aggregate covers as commonplace today as the more traditional quota share arrangements.”
The cyber (re)insurance market has come a long way since the first policy was underwritten around the turn of the century, but it now needs to respond decisively to the changing scale and scope of cyber risk. For example, data breaches have become more frequent in the last five years, with the number of reported data breaches globally rising by more than 300% (see Figure 1).
Figure 1: Number of Global Reported Data Breaches and Records Lost – 2011 to 2016 (Source: Risk Based Security/Cyber Risk Analytics)
There is also considerable concern over the scalability of the risk, where one cyber event is capable of triggering multiple claims under different policies at national, or even global, levels. As technologies become further embedded in the operations and strategies of organisations across all geographies and sectors, malicious actors will increasingly look to exploit the vulnerabilities associated with innovations such as the Internet of Things, cloud computing, autonomous vehicles, machine automation and connected devices.
David Flandro, continues, “Market participants have begun to explore how catastrophic cyber risks such as systemic cloud service provider failures or targeted cyber attacks on power grids could impact businesses and risk carriers. These efforts have highlighted the real potential for multi-billion dollar (re)insured pay-outs. Products designed to mitigate such systemic cyber risk accumulations are less readily available, but considerable progress can be achieved by drawing on the expertise that exists in the standalone cyber market.”
Sarah Stephens concludes, “Businesses and (re)insurers that react quickly will gain first-mover advantages in what could develop to be a very different cyber market. JLT is ideally placed to support our clients through this period of change and we look forward to working on their behalf to secure comprehensive and affordable products designed to address today’s complex cyber risk environment.”
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