March 27, 2015

Could Insurance Linked Securities Close the Cyber Risk Gap?

Paul Traynor

Just two percent of large British companies have separate insurance to cover cyber-attacks. This was the alarming finding of a UK Government report into cyber-risk insurance out this week. Meanwhile, it has been suggested by Stephen Catlin, the head of Catlin which is the largest Lloyd’s of London insurer, that the industry needs the Government to act as a backstop or 'insurer of last resort' for this nascent risk class.

On the face of it, calls for the Government to offer a backstop fund for those insurers providing cyber-risk cover might seem unrealistic given that companies will need cover of up to $1 billion. However, given the recent UK budget announcement to explore options for insurance linked securities (ILS) to be domiciled in the UK, there could be an alternative solution for harnessing ILS and the capital markets as an effective mechanism to mutualise cyber-risk far and wide.

The UK Government argues that information sharing will be critical in transforming the industry’s ability to effectively underwrite cyber-risk: uninsured losses go unreported and, unlike the US, there are no mandatory requirements in the UK to disclose breaches. The difficulty in modelling and pricing cyber-risk means premiums are six-times the cost of a property policy. ILS is an alternative and additional source of capital which benefits from the wider mutualisation of risk available from the capital markets and could lower the cost of cover.

If that reduction in cost drives greater uptake of cover, that in turn could help the gathering of much-needed data to help model cyber-risk and create a virtuous circle.