Cyber risks are a logical place for the use of insurance-linked securities (ILS) capital as there is a real need for capacity, according to Brian Duperreault, the CEO of insurance giant AIG.
Duperreault was interviewed on stage at the annual SIFMA IRLS conference in Miami, Florida yesterday.
He discussed the evolution of AIG’s own use of ILS, the development of its strategy after the acquisition of reinsurance group Validus and its specialist ILS fund manager AlphaCat Managers, as well as what that means for his insurer going forwards.
One area of interest in the discussion was Duperreault’s desire to expand the usefulness of AIG to its clients with the help of alternative capital managed by AlphaCat or accessed via other insurance-linked funds and investors.
On where this he sees an interesting and potentially compelling fit for the use of ILS, Duperreault singled out cyber risk underwriting as an area of potential opportunity.
“Cyber would be a classic use, I think a logical use of ILS. But we need to work on how we get there,” he said.
Duperreault was discussing his ambition to leverage the capital markets through AIG’s ILS fund manager AlphaCat Managers, or other capital providers, to develop new product offerings both for investors and insurance clients, with cyber reinsurance being one class of business he believes could benefit from risk transfer to ILS investors.
He explained that at AIG, “We will continue to look at how we use AlphaCat, or other ILS markets to develop product. The ILS companies themselves are looking around for new things.”
A lot of innovation comes from intermediaries who actually have a client with a problem, he explained.
Saying that innovation mostly comes out of a real need for a solution, or even near desperation for protection. Clients who really need to solve a problem they have and where perhaps traditional insurance and reinsurance means have not solved it to-date.
“Take cyber, there’s so much need for cyber cover and so little capacity, it’s one area that’s almost bursting at the seams,” he continued.
Cyber insurance buyers, especially at the large corporate end of the range, cannot buy sufficient cyber coverage to truly protect themselves against the enormous potential exposures in the marketplace.
Take the technology giants, whose multi-billion or even trillion-dollar enterprises are utterly reliant on connectivity and the integrity of their software or services. Not to mention other sectors where cyber attacks could create massive disruption, damage and losses. These are the areas Duperreault sees real potential in, it seems.
“We as risk takers like it when there’s a perception that the risk is greater than the real risk,” he said. “So when these things come and there’s just a real desire to feed the beast, then we’re there for it.”
But capacity is required to support that ambition and Duperreault is clearly realistic about even his giant insurance and reinsurance provider to solve these client issues on its own.
But while ILS can be used as a capital source to develop new and innovative product offerings for insurance clients, there does need to be demand.
“There has to be enough of it, to make it worth our while. So you can have a lot of different innovations in the ILS market but if there’s just not enough buyers interested in that solution it’s just not going to go anywhere,” Duperreault said.
Cyber risk is evidently one area where lack of supply of risk is not an issue, it is supply of capital to absorb it and product design to effectively transfer it.
It is perhaps telling that these large traditional market players are calling on ILS as a potential way to augment capacity for cyber risks. They are among the very firms that were calling for capital markets support on catastrophe risks two decades ago, in the infancy of the ILS and catastrophe bond market.