Cyber report calls for product clarity amid “finite” reinsurance capacity

Lockton Re has released a new report that addresses a pressing issue in cyber insurance: mixing separate first and third party risks with systemic risks.

In its new report titled “The All Risk Cyber ​​(ARC) Challenge: An Evaluation for Simplifying Cyber ​​Reinsurance,” the reinsurance industry examines the current state of the cyber market in relation to all risk products. of cyber (ARC) and how it restricts access to. the broader reinsurance segment.

“The current market suffers from a limited supply of reinsurance capacity, and a key reason for this is the difference in appetite between reinsurers who are comfortable with the short tail (first-party) and long tail (third-party) risks,” Lockton Cyber ​​​​Center senior broker and chair Patrick Bousfield said.

As the cyber insurance market continues to grow and expand in importance, the global “all risk aggregate” reinsurance product is struggling to keep up with demand for capacity, limiting access to the cyber market to specialized reinsurance market.

The report outlines some of the advantages of dividing the risk into its parts, focusing on the different methods of managing the risks of the first-party and third-party in the insurance value chain.

It also highlights the critical importance of high-quality data. According to Lockton Re, this approach will improve access to capital and expertise, improve claims management, and manage the associated tail risk growth in the cyber sector.

Separation of risks

“Separating first-party cyber reinsurance where possible will increase participation, making it easier to build new capacity that aligns with different reinsurance appetites,” said Lockton Re London cyber practice leader Oliver Brew. “It is important to remember that specialization within reinsurance can enable different risks to be treated in different parts of the market.”

The separation of first and third party risk for reinsurance purposes will reportedly allow clients to tap into both reservoirs of intellectual knowledge and reinsurance capacity.

In addition, this approach expands access to additional capital. Standalone cyber and professional lines divisions within reinsurance companies maintain separate loss development profiles, supporting independent assessments. Lockton Re notes that they have already observed the benefits of this approach with key industry participants.

“Insurance carriers can also have open and frank conversations with insurance buyers and brokers about the impact of first-party risk controls and third-party pricing for the original business, ” said Brew.

This improved product clarity facilitates the aggregation and trading of cyber risks in secondary and alternative markets, encouraging greater capital participation in the sector.

“Narrower reinsurance coverage means less tail risk uncertainty, which makes it easier for more capacity. When risk is as dynamic as cyber, it’s man-made in nature and thus rapidly changing -or, the insurance policies and the associated risk reductions have always caught up with reality, but this is a real opportunity to continue and push the industry forward,” said Bousfield.

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