Specialist insurance, reinsurance and ILS capital manager Hiscox has provided the capital to back a novel parametric cyber risk transfer arrangement that is based on a trigger from PCS and was transacted on the technology platform created by AkinovA.
It’s the first transaction from the AkinovA electronic trading platform or marketplace and was executed on December 23rd 2019 with regulatory oversight from the Bermuda Monetary Authority (BMA).
The arrangement appears to have been a bilateral transfer of cyber risks on an industry trigger basis, with Hiscox the capacity provider backing the transaction, not a market-wide syndication of risk.
As an investor in AkinovA, it’s perhaps no surprise to see Hiscox involved. The company also has a track record of innovative cyber related transactions, including in the Hiscox ILS area where third-party investor capital is managed and the unit has ambitions to launch a specific cyber ILS fund in future.
Hiscox undertook a lot of the work for the transaction, developing and structuring the arrangement, while also providing capital to underwrite it.
Guy Carpenter, the reinsurance arm of Marsh & McLennan, brokered the parametric cyber risk transfer arrangement.
Given the transaction is using a trigger from PCS there could be an element of industry loss data in the calculation, despite it being described as parametric in the release. Details of the trigger have not been made clear.
Hiscox has already been offering capacity for cyber industry loss warranties (ILW’s) using a PCS trigger through its reinsurance and ILS unit, although we’re not sure how widespread uptake has been at this stage.
The press release describes the transaction as a “quarterly cyber parametric instrument” with PCS acting as the reporting agent, again this hasn’t been expanded on.
The transaction was effected using a standardised insurance contract developed by Hiscox in conjunction with AkinovA and other industry participants.
Paul Jardine, former XL Catlin executive and a Non-Executive Director of AkinovA, commented on the transaction, “This first of its kind transaction is an important step towards creating new capacity urgently needed to underwrite the huge cyber risks which continue to emerge globally. Largely rear view-mirror actuarial assessments of cyber risks can only go so far. For new capacity to come to the market, cyber risks have to be tradable and conducted electronically within a regulated marketplace. That’s why AkinovA was created.”
While the trade seems bilateral in nature, so not evidence of a true marketplace for this risk emerging, it is a first step in that direction.
With the right triggers, cyber risks can be made much more readily transferable to sources of capital.
For Hiscox to back this transaction using a PCS trigger is the most important piece of this news.
It shows appetite for parametric cyber risk transfer transactions using a recognised trigger reporting agent that ceding companies and capital providers can buy into.
This kind of transaction could just as easily be traded in a traditional manner, as a collateralised or insurance-linked securities (ILS) deal, or using a marketplace that offers broad syndication to capacity.
So, this successful trade may lead others to look at such a structure, as a way to bring more efficient capacity into their cyber reinsurance or retrocession programs.