More information has been revealed on a recent innovative parametric cyber risk transfer transaction, which it turns out was for an asset manager to hedge potential cyber attack related disruption to U.S. power generation assets.
This parametric cyber risk transfer transaction first came to light in early January, when it was announced that global insurance and reinsurance company Hiscox had provided the capacity to back the novel trade, which had been structured to use a parametric trigger with data reported by PCS.
The bilateral trade also represented the first to be entered into using the Akinova electronic trading platform, executed on December 23rd 2019 with regulatory oversight from the Bermuda Monetary Authority (BMA).
Details were a little lacking in the original press release regarding the transaction, but now more information is available that show off the more innovative angles of the trade.
The innovation is all in the cyber risk transfer product design and structure provided by Hiscox alongside reinsurance broker Guy Carpenter and also the parametric trigger provided by PCS.
Developed and structured by Hiscox, who worked closely with broker Guy Carpenter to ensure the client’s exposures were adequately covered, the parametric cyber risk product was a quarterly instrument.
Hiscox also provided the capital to support the transaction, although it’s not clear if this is solely traditional insurance or reinsurance capacity, or whether any of the risk has flowed to the Hiscox ILS funds.
The ultimate beneficiary and purchaser of the protection is revealed to have been an asset manager in financial services.
This protection buyer wanted coverage for certain assets which are exposed to cyber related disruptions to U.S. power generation, hence this was not a typical insurable interest and as a result ideally suited to a parametric solution.
Using a parametric trigger enables the asset manager to carve out the cyber exposure in its portfolio of investments in energy related assets, ensuring that should a major cyber attack or incident strike the U.S. power generation sector it would receive some financial compensation, if the event was severe enough to breach the parametric trigger.
PCS provided the reporting data for this parametric trigger, which is a slight departure from its more usual role of aggregating insured claim data and reporting on designated catastrophe insurance and reinsurance industry loss events around the globe.
The specific parametric trigger for this cyber risk transfer or insurance trade is based on a third-party power generation index, taking into account outage times and disruption levels. Hence it tracks power generation outages and disruption due to a cyber related event.
A third-party reporting agency is key for these transactions and with PCS, part of Verisk, perhaps the most widely used in insurance and reinsurance circles it makes sense to leverage the company as a reporting agent for the transaction.
Adam Szakmary, Director of Underwriting – Bermuda, Hiscox Re & ILS, commented on the innovative cyber risk transfer deal, “In an ever-changing and rapidly growing market, it’s important to challenge ourselves to find new and innovative opportunities to advance risk markets, especially in areas like cyber where the traditional approach may be falling short. AkinovA’s approach to enhancing electronic trading is a great example of this pioneering spirit, however, to make vision a reality it was a team effort across underwriting, analytics, wording, operations, and finance. We are thrilled to be involved in this transaction and to be early advocates for the expansion of the risk cyber risk transfer market.”
Erica Davis, Cyber Risk Strategy Leader and Managing Director at broker Guy Carpenter, added, “This first-to-market cyber parametric transaction shows the emergence of innovative structures and triggers to address this quickly evolving risk. By developing a trigger for power outage originating from a cyber event, this deal helps to solve a relevant and substantial protection gap. As a global leader in cyber modelling and placement design, Guy Carpenter was uniquely qualified to execute this market-transforming opportunity. Cyber risk presents distinct quantification challenges and only through creating such solutions can we develop a robust cyber market positioned for sustainable growth.”
Tom Johansmeyer, Head of PCS, also commented, “PCS has been a strong supporter of exchange-traded risk for years, and we believe that this type of vehicle can be instrumental in helping to grow the cyber market. Demand for cyber cover has grown so quickly that capacity shortfalls have become an important topic of conversation in the market. Relying on traditional practices won’t be enough to support the further expansion of the most important class of insurance business to arise in decades. This latest transaction shows that new ideas can take hold and deliver rapid benefit up and down the risk and capital supply chain. We’re proud to have been part of this process.”
Insurance, reinsurance and ILS market service provider and facilitator Horseshoe also acted to help get this deal to market.
André Perez, Chief Executive Officer and Chairman of Horseshoe Group, said, “This first of a kind transaction saw Horseshoe provide important compliance and regulatory services to AkinovA’s participants. Working with AkinovA continues to show Horseshoe’s determination to support the industry innovation, growth and efficiency agendas.”
The trade was executed using a standardised insurance contract created by Hiscox alongside Akinova and other industry participants.
It’s not readily clear whether an electronic platform was actually required for this trade, as being bilateral in nature it could have been as readily placed offline it seems.
What’s truly innovative about this trade though, is the way a parametric trigger has allowed an asset manager to carve out and transfer (secure insurance for) a risk embedded in the assets of its investment portfolio effectively, providing yet more evidence of the efficacy of parametric triggers for this kind of risk transfer.
In this way, it is similar to the recent Sierra Ltd. catastrophe bond deal, that saw an asset manager leverage parametric risk transfer to carve earthquake risks out of its mortgage investment portfolio.
Hiscox and Guy Carpenter deserve the kudos in this case, for developing and structuring an effective risk transfer solution to help an asset manager reduce its investment portfolios exposure to cyber attacks and incidents, while PCS has shown an appetite to expand and offer parametric trigger reporting services.
As with the Sierra Ltd. cat bond deal, this parametric cyber risk insurance trade demonstrates a way to secure risk transfer using parametric triggers that can be applied to many other use-cases, for asset managers or anyone with large portfolios of assets (financial or physical) that hold specific exposures that can be measured and have parametric triggers designed around them.