ILS meets cyber risks
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Cybersecurity is a generational exposure, according to Rick Welsh, CEO of Sciemus, but Bermuda has a chance to lead in dealing with it—and ILS could have a part to play.
Lobbyists and regulators in the US and UK have been calling on the global insurance industry to do more to counter the threat of cyber attacks and to provide products that the insurance market has historically not been able or willing to underwrite.
Cyber risk does not represent an easy singularity of exposure. At its nub, it represents converged risk that is increasingly more centric to enterprise risk. Capital—be that insurance, reinsurance or non-traditional—still looks at risk through siloes, yet this technology convergence requires a different approach. Our approach should equally apply to understanding technology, its weaknesses, the exposures created by technology convergence and especially, cybersecurity, in order for us as an industry to be more effective.
The Bermuda market is in a unique position to push us closer to that inflection point. The Bermuda market does not, in isolation, provide reinsurance solutions that are unavailable elsewhere—save one or two very notable exceptions. Yet, there is the opportunity for Bermuda to provide new, creative solutions that would drive progress in the cyber re/insurance space globally in a way that Europeans cannot—distracted as they are with EU’s General Data Protection Regulation (GDPR), which comes into force on May 25.
Similarly, in insurance-linked securities (ILS), the main focus is on capital management, stop loss, retrocession and industry loss warranty (ILW) solutions which only serve to move the same risk further down the risk ladder. The same focus on parametric approaches with innovative capital structures will serve to more evenly redistribute risk and drive the type of coverage innovation and progression so eagerly sought by clients. It will also provide the capital management and preservation more stridently being required by financial regulators.
At the core, there is the ongoing debate as to whether we, as an industry, are offering wide enough or valuable enough cyber coverage. Despite the opportunity to advance solutions, with one or two exceptions, Bermuda is not currently regarded as a driver for new coverage or product despite the dexterity, ambition and creativity shown in other areas.
If you break it down, it isn’t a question of whether the coverage is wide enough but rather, how can the modelling “bench strength” be used to enable more innovative capital to address client needs in a way that London and the US have been unable to.
Better modelling analysis
Cyber is a generational exposure that will represent an increasingly larger proportion of enterprise risk and, because of that, more modelling acuity is required to help reinsurance/non-traditional capital drive innovation forward in a way that the London and US markets have not. Bermuda has natural advantages in modelling and access to capital that should allow it to be a progressive leader in cyber insurance.
Beyond the issue of coverage, we also need to focus on limits versus the appetite for growth. The limits currently available in the cyber market (globally) are too disparate in appetite and mandate to adequately sate demand for coverage or limit. It is here that the most immediate opportunity rests for the Bermuda market. Bermuda’s proximity to mutuals provides an opportunity to feed in to client appetite and match that with capital and coverage solutions.
Reinsurers are continually looking for new modes of cyber exposure management, yet this in and of itself will not drive growth. Investment by Bermudian capital or at least investment driven by Bermuda will help unlock a more modelled approach that has been so successful in driving ILS for property cat. That more modelled approach accords with how larger corporates view their own cyber exposure and will help drive product development that will itself, fuel growth in the cyber market. Existing retro or cyber ILW does little to drive product or demand, or create capital.
If reinsurers can deploy more capital into insurance licensed vehicles—inside and/or outside Lloyd’s—and support a more modelled approach to event exposure this will create the capacity that clients are demanding. Together, we can then demonstrate to regulators that we are responsibly deploying the requisite exposure management to avoid financial contagion.
Rick Welsh is chief executive officer of Sciemus.
This article first appeared on Intelligent Insurer.
Sciemus, ILS, Rick Welsh, Bermuda, cyber, risk
ILS meets cyber risks