Simplify cyber reinsurance to open up the capital markets: Lockton Re

Independent reinsurance broker Lockton Re has called for cyber reinsurance to be simplified, saying that this will help to solve the capacity supply for cyber risks, while also opening up capital markets and ILS capacity avenues.

In a new report, Lockton Re looks at how cyber insurance products commingle distinct first and third party risks, as well as systemic risks.

Patrick Bousfield, Senior Broker and Chair of the Lockton Cyber Centre, Lockton Re, explained,” 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.”

The broker states that, “The global “all risk aggregate” reinsurance product continues to trail capacity demand and limits the cyber market’s access to the wider specialised reinsurance market.”

The report states that breaking cyber into its requisite parts, with a particular focus on the differences in how First Party and Third Party risks are handled in the insurance value chain, can yield benefits.

In addition, there’s a need for better data for cyber risks and losses, Lockton Re said.

“This approach can potentially improve the access to capital and expertise as well as the handling of potential claims and the related tail risk development in Cyber,” Lockton Re explained.

Oliver Brew, London Cyber Practice Leader, Lockton Re, said, “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.”

Through the separation of First and Third party risks, Lockton Re believes that two pools of reinsurance capacity can develop, along with separate intellectual capital pools.

Brew continued, “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.”

Lockton Re also said that greater product clarity in cyber risks can “make it easier to package and trade Cyber risks in the secondary and alternative market, encouraging more capital to participate in the market.”

The report states that, “The narrower reinsurance coverage means less tail risk uncertainty making it easier for additional capacity.”

Lockton Re believes that systemic or catastrophic cyber risk represent perils that are “well suited for alternative capital markets and can be packaged in a way that is attractive to non-traditional (unrated) capital structures.”

“Our contention is that splitting out the perils into their constituent parts will enable more effective risk transfer to reinsurers, and further down the value chain (retro/ILS) capacity in a more targeted and scalable fashion,” the report also says.

Bousfield concluded, “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.”