Volatile Cyber Market Struggles to Boost Reinsurance Capacity

The cyber insurance market could benefit
greatly from more reinsurance cover but it has been a challenge to
attract interest. Part of the reason is because the cyber market is
a relatively new one compared to others in the property space with
more adequate reinsurance options, according to a panel of
experts.

"Cyber in general is a nascent peril, and because of its
complexity … a lot of traditional reinsurers … are quite scared and
they're solely trying to understand the risk," Anjali
Dharma-Wardana, an underwriter with the MGA Envelop Risk, said during Carrier
Management's cyber reinsurance webinar on Sept. 9. (The
full free webinar
can be accessed via this link).

For Now, No Need for Federal Cyber
Reinsurance Backstop: Experts

She explained that reinsurers consider taking on risk when they
understand how the risk is quantified, and need minimum rates and
pricing and other structures to trigger coverage. For cyber, she
said, "previously that's never really happened." While additional
reinsurers haven't signed on, the market has also struggled to
attract ILS capacity or "some other force," she said, unlike other
property cover that's more established.

Marc Voses, a litigator, cyber expert and partner at the law
firm Clyde & Co., agreed.

"We're in the early stages of this product and the development
of the data with respect to the losses are still maturing," Voses
said. "The difficulty is that may of the lawsuits that are giving
rise to the losses and many of the regulations that are giving rise
to the first party costs are still developing, which are then also
increasing costs for insurers and reinsurers because the losses and
claims expenses are increasing year-on-year."

Voses said that as a result, data points from five years ago
that were considered good are no longer helpful in evaluating
whether or not to take on risks.

"That's where reinsurers and retrocessioners are finding
difficulty in not only pricing, but also the willingness to take on
the risk," Voses said. "The evolution of the data is such that it
doesn't give consistency."

In the interim, Dharma-Wardana said, the struggle to determine
cyber's true financial risk continues.

"It's up to industry experts, whether they be reinsurers or
modelers or whatnot, to figure out ways to quantify risk," she
said. "Historical data is not super relevant to when you're trying
to look forward for cyber risk especially. But there are different
data sources you can try to look at, maybe using some complex or
simple statistical techniques because cyber is a digital risk. So
you can be creative with the types of data and the models that you
build on it."

Phil Edmundson, founder and CEO of Corvus Insurance, a
cyber-focused MGA for small and medium-sized businesses, said that
cyber's nature as a digital risk creates some options to determine
risk that enable insurers to quantify risk accurately.

"The fact that it is a digital risk and it's the way the economy
is moving, there's actually a lot of energy around cybersecurity
generally, and a lot of tools that are available for more modern
insurers and reinsurers to use in order to evaluate risks, both at
the individual account level and at the portfolio level," Edmundson
said.

He noted that both Envelop Risk and Corvus approach cyber risk
this way, and he argued this is a positive development to make
cyber coverage less risky.

Having "that kind of data infrastructure that collects data,
both on individual accounts and in the aggregate allows for
analytics to change and move with the nature of risk," Edmundson
said. "It's a great change for us in the industry."

That may be, but Edmundson admits that it will take some time
for these approaches to become more widespread.

"I do think it's going to take a couple of years for us to find
a new equilibrium because supply is static and demand is increasing
immensely," Edmundson added.

This article first was published in
Insurance Journal's sister publication, Carrier Management.

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