Cyber report emphasises need for clarity as reinsurance capacity is "finite"

Cyber report emphasises need for clarity as reinsurance capacity is “finite” | Insurance Business Asia

Cyber

Cyber report emphasises need for clarity as reinsurance capacity is “finite”

What can insurers do to clarify their offerings?

Lockton Re has released a new report addressing a pressing issue in cyber insurance: blending distinct first and third-party risks with systemic risks.

In its new report titled “The All Risk Cyber (ARC) Challenge: An Evaluation for Simplifying Cyber Reinsurance,” the reinsurance business examined the current state of the cyber market with regards to all risk cyber (ARC) products and how it hinders access to the wider reinsurance segment.

“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,” Lockton Cyber Center senior broker and chair Patrick Bousfield said.

While the cyber insurance market continues to evolve and expand significantly, the global “all risk aggregate” reinsurance product struggles to keep pace with the demand for capacity, limiting the cyber market’s access to the specialized reinsurance market.

The report outlines several advantages of segmenting the peril into its constituent parts, focusing on the differing approaches to handling first-party and third-party risks in the insurance value chain.

It also underscores the critical importance of high-quality data. According to Lockton Re, this approach could enhance access to capital and expertise, improve claims handling, and manage associated tail-risk development in the cyber sector.

Separation of risks

“Separating first-party cyber reinsurance where possible can increase participation, making it easier to build new capacity aligned with varied reinsurance appetites,” said Lockton Re London cyber practice leader Oliver Brew said. “It’s important to remember that the specialization within reinsurance enables the separate perils to be treated differently by distinct parts of the market.”

The separation of first and third-party risk for reinsurance purposes will reportedly allow clients to tap into two reservoirs of intellectual knowledge and reinsurance capacity.

Further, this approach broadens access to additional capital. Standalone cyber and professional lines divisions within reinsurance companies maintain separate loss development profiles, supporting independent assessments. Lockton Re noted that they have already observed the benefits of this approach with key industry participants.

“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,” Brew said.

This enhanced product clarity facilitates the bundling and trading of cyber risks in secondary and alternative markets, encouraging greater capital participation in the sector.

“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,” Bousfield said.

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