Beazley has been investing time and effort in redesigning terms and conditions around its cyber insurance products, as it feels by better defining systemic cyber risks, it will help to give more confidence to capital to enter the sector, including from third-party or ILS investors.
Speaking during his firm’s earnings call recently, Beazley CEO Adrian Cox laid out the re/insurance firms actions that are being taken to try and help develop a more functional cyber reinsurance marketplace.
Systemic cyber risk, demonstrating an enhanced understanding of it and giving confidence to capital providers that it is understood within underwriting and effectively limited, in terms of exposure, as well, are seen as key.
Adrian Cox explained, “We’ve long talked about how we think about systemic risk and we’re comfortable with the systemic risk we have in our cyber book at the moment.
“But as we look forward and think about a cyber market that is three, five, six times as big as it is now and think about what those systemic risks might grow to, if they’re not defined more precisely, we though that now was a good time to get the policy forms in place that will allow that business to scale, fundamentally.”
Cox continued to explain the actions taken, more specifically to better describe and limit systemic cyber exposures in Beazley’s policies.
“We’ve done three things with our policy forms,” he explained. “We have redefined two exclusions, the war exclusion and the infrastructure exclusion because both were quite out of date. A lot has happened to what war can look like and what infrastructure is in the last fifteen years, so we’ve brought them up to date.
“And then we’ve started to describe what we think the key systemic risks are and given ourselves the opportunity to sub-limit those.”
There are multiple benefits to taking this approach, to Beazley itself, by allowing it to better manage its aggregates, Cox said, but also for the market in general.
“It also helps us start to define what we think the key systemic issues are, which we think will help attract capital to the industry to allow us to hedge it at more scale,” Cox explained.
“Fundamentally this is about being able to attract capital into the business to allow it to scale at a total level, and to do that it needs to be able to access much more of the reinsurance and alternative capital markets than it does do currently,” he added.
Beazley is thinking about cyber risks in much the same way as it has thought about catastrophe risks in the past.
Property catastrophe risks became a more tradable risk asset once the industry began to describe exposures better. Of course, those descriptions became looser during market softening, but are once again being firmed up in the current hard reinsurance market environment.
Cox stated that, “We think about property as an allegory. So for property to be able to function properly it has to hedge its cat risk, and to do that it uses virtually the entire reinsurance market, the alternative capital market, and ILS and all that sort of thing.
“I think cyber needs to do the same thing.
“Helping to be much more precise about what it is that we’re trying to hedge I think will help that transition.”