Global reinsurance broker Lockton Re has released a new report which discusses the benefits of breaking the cyber peril into requisite parts, an approach the broker says can potentially improve the access to capital and expertise.
Titled ‘The All Risk Cyber (ARC) Challenge: An Assessment to Simplify Cyber Reinsurance,’ Lockton Re’s new report notes how the global “all risk aggregate” reinsurance product continues to trail capacity demand.
This, says the broker, limits the cyber market’s access to the wider specialised reinsurance marketplace.
According to the report, there’s numerous benefits to splitting up the cyber peril, with a particular focus on the differences in how First Party and Third Party risks are handled in the insurance value chain.
“The current market suffers from a finite supply of reinsurance capacity and a key reason for this is the divergence of appetite between reinsurers comfortable with short tail (First Party) and long tail (Third Party) risks,” said Patrick Bousfield, Senior Broker and Chair of the Lockton Cyber Centre, Lockton Re.
Additionally, there’s a huge emphasis on the need for good quality data, says the reinsurance broker.
The firm explains that this approach of breaking up the cyber peril can potentially improve the access to capital and expertise as well as the handling of potential claims and related tail risk development in cyber.
“Separating First Party cyber reinsurance where possible can increase participation, making it easier to build new capacity aligned with varied reinsurance appetites. It’s important to remember that the specialisation within reinsurance enables the separate perils to be treated differently by distinct parts of the market,” said Oliver Brew, London Cyber Practice Leader, Lockton Re.
The broker notes that separating First and Third Party risk for reinsurance purposes enables clients to utilise two pools of intellectual knowledge and reinsurance capacity aggregate, which in turn allows access to more capital.
“Insurance carriers can also have open and frank conversations with insurance buyers and brokers about the impact that risk controls have on the First Party and Third Party pricing for the original business,” said Brew.
Lockton Re also feels that product clarity could make it easier to both package and trade cyber risks in the secondary and alternative market, which would encourage more capital to enter the market.
“The narrower reinsurance coverage means less tail risk uncertainty making it easier for additional capacity. When the risk is as dynamic as cyber, man-made in nature and thus rapidly changing, insurance policies and associated risk mitigation is forever catching up with reality, but this is a real opportunity to get ahead and push the industry forward,” concluded Bousfield.