Hiscox takes the cyber lead
Industry loss warranties (ILWs) are not new to the market. In fact, they are common within the mature property reinsurance and retro markets. They provide the ability to hedge risk without sharing data that a carrier may not want to disclose, and they allow for protection in situations where aggregations of exposure are difficult to quantify.
This means an organisation can take out coverage based on the total insured industry loss, rather than the losses of a specific insurer. In addition, ILWs provide swift recoveries without the need for in-depth claims adjustment—particularly appealing in situations where a quick infusion of capital is necessary, or when the full economic loss may be difficult to quantify.
The Hiscox cyber ILW is designed to respond to an aggregation of cyber losses throughout the year and to help address the uncertainty around cyber tail risk for re/insurers. This makes it an effective hedging mechanism for cyber underwriters who may be concerned about large cyber loss accumulation. They require a third party to act as an objective decision-maker on the size of the market loss, which for this product is the PCS Global Cyber Index.
The development of a cyber ILW is an innovative solution to an ever-growing problem. The interconnected, global nature of cyber space creates the potential for massive and unexpected catastrophic losses. The market has yet to experience such an event, but the potential should be a concern for virtually every organisation regardless of size or sector, and innovation when it comes to protecting against a ‘black swan’ tail event is crucial.
The Hiscox product addresses immediate needs, but also has one eye on the future. Cyber risk is evolving and the insurance market expanding, so the need to address specific risks with appropriate capital will become more and more important. ILWs help address this issue due to their ability to tailor the covers by way of specific risk appetite, covered industry, loss type, and so on.
This means that buyers can purchase cover for their specific needs, and sellers can create discrete and diversified portfolios of risk which should in turn attract more capital into the space.
Developing these types of products is not easy. A key challenge is to make an estimate of the insured losses going forward. This is difficult to do when the underlying cyber risk is increasing at the same time as insurance take-up rates and purchase limits. It requires underwriting experience, quality data, and good instincts.
Hiscox developed its cyber ILW by leveraging the expertise of some of its 70 colleagues working on cyber across the Hiscox Group, via data collected through its annual Cyber Readiness Report and thanks to brokers, PCS and expert vendors. All these insights went into the melting pot to create fully customisable cover that would be truly valuable to clients.
Hiscox’s approach to matching risk with capital is long-standing, and the cyber ILW is the latest in the company’s ongoing focus on cyber. In 2017 it established a ‘virtual business unit’ dedicated to its cyber offering across the globe, and a CyberClear Academy training course for customers to help them mitigate the cyber threat.
Hiscox’s reinsurance business already offers cyber excess of loss including stop-loss, aggregate per policy and occurrence, and the introduction of a cyber ILW that provides worldwide coverage complements its existing product suite.