Cyber risk is a hot topic for the insurance and reinsurance industry, perhaps the highest profile of the new lines of business everyone would like to break into. But to date, the industry has been a little tentative at assuming too much cyber risk, something that can change according to Tom Johansmeyer, Assistant Vice President, PCS Strategy & Development at ISO.
I vividly remember being on stage at the Artemis NYC event last February when the discussion turned to cyber. With what little false innocence I could muster, I asked my fellow panelists if they believed the cyber insurance market’s current offerings meet the needs of original insureds. Justifiably, I got laughter in reply.
And that’s worth keeping in mind as we get ready for the annual Rendez-Vous de Septembre, which is right around the corner. It’s likely you won’t be able to walk from one side of Café de Paris to the other without hearing “cyber” at least a few times. At least you will if you walk by my table.
The global reinsurance industry is hungry for more cyber risk. And more and more, people in our industry are saying that cyber could grow enough to provide a meaningful offset to the softness in the global property-catastrophe market. That brings significant potential for earnings growth and—potentially—a return to the ROEs of yesteryear.
For the opportunity to materialize and scale, though, more original cyber risk needs to come into the market…and that brings us back to the opening problem: How do we put a relevant cover into the hands of the original insured?
The distribution challenge rears its ugly head again, right? Distribution can have many constraints: corporate budgets, relevance of protection (especially relative to budget), pricing, and how easy the cover is to understand. That’s all pretty standard in every corner of the insurance industry—from mature markets to the stuff that’s new, exotic, and emerging. Yet, in cyber, there could be one more aspect to the distribution challenge, and it’s one you might not expect: capacity.
In today’s soft market, capacity isn’t usually seen as a constraint. There’s plenty available, with even more on the sidelines as the global pension sector seeks to reach a 2 to 3 percent target allocation for insurance risks. And doubtless, there’s more capacity available for cyber, as long as it exists within the constraints of today’s covers or perhaps ekes out a modest expansion of limits or terms. In the end, this provides a path to slow, measured growth—not the aggressive increases the market seems to anticipate. For this to change, capacity to support a truly expanded market must be brought to bear.
And that means working both ends of the spectrum at once. While the primary market adapts to the needs of insureds to attract original cyber risk, reinsurance and retrocessional writers should seek to provide capacity adapted to support more flexibility further down the risk and capital supply chain. In addition to improved analytical capabilities to help risk bearers understand what they’re assuming, risk-transfer methods can also attract more flexible capacity—resulting in more opportunity, ultimately, to help primary insurers better meet their clients’ needs. And when that happens, more risk comes into the market, the industry grows, and the volume creates the experience and data to feed analytical tools…to help primary insurers better meet their clients’ needs.
As a result, for example, improvements to the cyber retro market could play an important role in expanding the cyber sector overall. And a robust cyber ILW (industry loss warranty) market could accelerate that process.
Although growing, the cyber retro market is currently fairly small. After all, the cyber insurance market as a whole is still quite new. As tools for fast, cost-efficient risk transfer, ILWs could enable the rapid deployment of capital that reinsurers could use to expand their relationships with cedents, allowing them to source and write more original cyber risk while managing their accumulations.
While there’s been appetite for ILW cover (buying and selling) throughout the cyber sector, the primary barrier to risk transfer has been the lack of a credible, independent industry loss index. Based on significant demand from the global market, PCS® has developed an independent global cyber loss index [LINK:TBD LANDING PAGE]. For the per-event component (the initial release), we’ve begun to build a historical loss database, consisting of affirmative cyber insured losses of at least US$20 million, using the same approach we developed for the PCS Global Marine and Energy™ loss index.
For cyber insurance to realize its full potential, a lot has to happen. In addition to the further adoption of analytical tools, what the industry needs most is experience. And capacity breeds experience. So, growth comes from the availability of underwriting capital, and for that to happen without a robust loss history, something has to break the age-old chicken-and-egg cycle for new product development. That’s where a thriving cyber ILW market can help. Doubtless, this isn’t the only answer, but it’s certainly an important part of the solution.
Author – Tom Johansmeyer:
Tom Johansmeyer is assistant vice president, PCS Strategy and Development, at ISO Claims Analytics, a division of Verisk Insurance Solutions. He leads all client- and market-facing activities at PCS, including new market entry, new solution development, and reinsurance/ILS activity. Currently, Tom is spearheading initiatives in global terror, global energy and marine, and regional property-catastrophe loss aggregation. Previously, Tom held insurance industry roles at Guy Carpenter (where he launched the first corporate blog in the reinsurance sector) and Deloitte. He’s a veteran of the U.S. Army, where he proudly pushed paper in a personnel position in the late 1990s.
This article was contributed by a sponsor.