Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Cyber has all the hallmarks of becoming a peak peril: Syroka, Fermat Capital


Cyber risk is increasingly showing signs of becoming a peak peril and as the insurance-linked securities (ILS) sector continues to look for growth it makes sense to focus on these peak levels of the insurance and reinsurance risk tower, according to Joanna Syroka, Director of New Markets, Fermat Capital Management.

Cyber attack warningCyber risk continues to evolve and expand as the world becomes increasingly interconnected and digitalised, and, at the same time, insurers, reinsurers and also ILS players are looking at ways to protect against the peril in both an effective and profitable manner.

In September, during the 2018 meeting of the reinsurance industry in Monte-Carlo, Artemis held its third executive roundtable in the region, and the potential for ILS to participate in the cyber risk space was one of the topics discussed by ILS and re/insurance market experts.

“Cyber risk has all the hallmarks of becoming another peak peril, if it’s not already. We were talking about where ILS can grow earlier and of course new markets and new frontier risks is one area of growth ahead.

“I think it makes fundamental sense for ILS to continue to focus on peak perils in the reinsurance market, and cyber therefore will most likely need ILS capacity in the future,” said Syroka.

Research from across the insurance and reinsurance industry has suggested that the potential, vast cost of a major cyber breach is too much for the traditional insurance and reinsurance sector to take on, leading some in the industry to highlight the potential for capital markets-backed capacity to play a role.

Richard Lowther, Chief Operating Officer (COO), Insurance-linked strategies, Hiscox Re, said during the roundtable discussion that he is seeing interest from investors.

“The issue is that many are used to property cat where there are independent models based on the science of a physical phenomenon. Investors will also want answers on how correlated cyber is to both cat and other investment strategies they may allocate to. They also want a level of valuation certainty to know that the tail is capped out during the risk period,” said Lowther.

Eric Schuh, Global Head of P&C Solutions at reinsurance giant Swiss Re, said that nobody has anything against cyber as a business, highlighting that it’s governed by the same economics as everything else, wherein, there’s a problem if the premium is insufficient to pay more than expected losses.

“But I think a lot of players in the market would agree that the accumulative nature of cyber is maybe not remunerated in the same way as for some other lines of business. So, therefore for me, the question is, for an ILS investor for example, would there be enough margin in this business for them to be interested in the same way as nat cat.

“Because I think this is the core of the issue why also in reinsurance, everyone likes the business, it is growing and it is not as correlated as some other things, but, if the big event risk is not paid for, it’s strange, right?” said Schuh.

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