A new report which addresses a pressing issue in the cyber insurance arena, specifically the blending of distinct first and third-party risks, along with systemic risks, has been released by Lockton Re.
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 Centre 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 specialised reinsurance market.
The report goes on to outline several advantages of segmenting the peril into its constituent parts, with a particular focus 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. This approach, according to Lockton Re, has the potential to enhance access to capital and expertise, as well as improve claims handling and the management of associated tail risk development in the cyber sector.
“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,” Lockton Re London cyber practice leader Oliver Brew said.
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 divisions and professional lines divisions within reinsurance companies maintain separate loss development profiles, thereby 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 could also facilitate 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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