Collaboration is Key for the Future of the Cyber Insurance Market

For cyber insurance to maintain its relevance, stakeholders will need to work closely to tackle the fresh challenges from this ever-evolving risk.

Lloyd's and Aon recently jointly hosted the Futureset Cyber Innovation Forum to bring insureds, brokers, and insurers together to discuss the state of the market and map out a path to long-term success. Through the forum, it was clear that cyber is, as CFC Underwriting’s Chief Executive Officer Graeme Newman labelled, “the most dynamic risk we [the insurance industry] have ever faced.” This risk is one that Lloyd’s has never shied away from.

In his opening remarks as moderator for the event, Aon’s Alistair Clarke, Head of Cyber Broking UK, said, “While it’s fair to say that the cyber insurance market has been through a good amount of maturation over the last three years in response to that ‘dynamic’ risk challenge, I think it’s now in a much stronger position going forward, particularly at Lloyd’s.”?

However, during the forum it was also clear that close collaboration amongst stakeholders has become a key theme in the delivery of a strong and sustainable cyber insurance product. This collaborative approach is particularly important given the journey that many organisations are on when it comes to the digitalisation of their businesses and how cyber risk is interconnected with their other major risks including business interruption, supply chain and reputational damage.

Lloyd’s Unique Structure

Elizabeth Robertson Queen , Vice President of Risk Management for information services provider Wolters Kluwer, said, “Over the past 20 years, we underwent a massive transformation from print to digital expert solutions for professionals. The insurance market evolved with us every step of the way. Our insurers continually work with us to understand the risks we face. It’s not just a once-a-year renewal. It’s an alignment that involves reciprocal sharing of information.” She added, “The very nature of ‘cyber’ demands that we (insurers and insureds combined) collectively manage and control evolving risks together, not just compete in a shared marketplace.”

“It’s an approach and attitude that Lloyd’s has always been well placed to deliver given the unique structure of the market” said CFC Underwriting’s Newman, “In London, we have the deepest pool of talent of insurance professionals in the world, combined with the second deepest talent pool of technologists, alongside an incredibly rich history of innovation and entrepreneurialism, coupled with Lloyd’s globally unique marketplace, and a unique capital model." That capital model and the syndication of risk really allows Lloyd’s to take on emerging areas of risk like cyber he added, “not that cyber is new given ‘London has pioneered the cyber market for 20 years.’”

The Systemic Risk Challenge

That doesn’t mean that there aren’t still challenges for the market to solve related to cyber risk. The systemic nature of cyber sets it apart from every other risk given it could affect every part of a business, whatever the geography said DPDHL’s Mark Jones, SVP Global Insurance Programmes, who urged the insurance industry to recognise that vulnerability, “Please don’t put exclusions in that then create holes in an interconnected world. We can’t have our insurance not matching the risk profile we’ve got.”

Attracting New Capital

The systemic nature of the risk provides a fresh momentum for new and alternative forms of capital to come in and support the market in insuring catastrophic events, which is something that the market is already exploring. Beazley’s Paul Bantick , Group Head of Cyber, told the forum, “For example, a major cloud service provider failure will affect many organisations and we need to be able to respond and provide coverage. We have seen in other catastrophe exposed lines of insurance where alternative capital – ILS, catastrophe bonds – have come to the fore and that’s what we believe needs to happen in cyber.” There are already signs of growing investor confidence in the cyber market’s ability to manage systemic cyber risk, he added, and it’s unlikely to be long before London sees more cyber cat bonds issued, building on Beazley’s recent success.??

Again, it comes down to collaboration and how the market can work together to encourage new investors to get on board with the risk. “I think there is an abundance of capital that is prepared to support these risks, particularly at some of the returns that could be generated. As a market we need to be able to articulate to these capital providers the parameters we’re putting around that and what expectations they can get on a range of outcomes,” said CFC’s Newman, who believes there is capital out there to write those cat type cyber risks but they can’t be on a “blanket, unknown, full limit basis” and it makes sense to “start off small, and build the capital base”.

The AI Exposure

Of course, cyber is continuing to evolve at pace, not least with the advance of AI. Again, AI is nothing new to the market which, Newman pointed out, is already paying AI related claims in relation to social engineering scams. But it can make the achievement of stable pricing, a much-needed consistency for buyers harder to achieve.

Beazley’s Bantick told the forum, “We’ve created expert groups looking at those [AI] exposures. How is this new technology going to impact the underlying cyber threat? Can we manage that? Can we help our clients become more resilient?” Adding that the market has gone through the same process with ransomware.

Controlling Risk Together

There’s a hugely positive message coming out of Lloyd’s and London when it comes to cyber and what has already been achieved, said Aon’s Clarke, “but I don’t think anyone is complacent about the dynamic nature of the risk and the need to keep evolving and adapting the product to help meet clients’ need.” To do that successfully he concluded and to maintain the strength and sustainability of the market, it’s all about that word again, ‘collaboration’.