Emerging Global Scenario of Cyber Risks(RE) Insurances

(A)  Introduction:

‘CYBER’ is a term derived from ‘CYBERNETICS’ which means comparative study of automatic communications and control of functions of living bodies and in mechanical electronic systems such as in computers.

Cyber Risk Management is evolving as a specialized science which does research on volatile issues arising out of revolutions in all Information Technologies. Computer Programming, Artificial Intelligence, Computer Virus and Voluminous and valuable data of business houses can be damaged, disrupted and lost in events of Cyber Crimes of Hackers. No business is safe from determined Hackers who use their skill for extortions. Ransomware, Wannaeryand Petrawrap outbreaks have been known to cause ‘Crippling Disruptions’ which can be inflicted across all sectors of all industries!

Men have invented sophisticated Revolutionary Information Technologies which enslave men to-day with unprecedented dependence on Electronic Mechanisms.Large scale disruptions are caused by these Cyber Risks.

It is a serious challenge to Insurance and Reinsurance Underwriters: UNDERWRITE CYBER RISKS ONLY AFTER FULLY UNDERSTANDING CYBER RISKS. Risk Management of all kinds of Cyber Risks is the main thrust in specialized Cyber Risk Management not by ‘Trial and Error’ but by ‘Trust and Advanced Technologies’.

Cyber Terrorism is another area where newer challenges are to be faced.

Various types of Cyber Risks with special characteristics of newer kinds of claims need to be surveyed and handled in absolutely untraditional ways by all concerned – insurers, reinsurers, surveyors, brokers etc.

Again Rating Technologies of Insurable Cyber Risks are to be evolved in the light of past events of losses, kinds of exposures and little awareness of Insureds – Insurers – Reinsurers and Brokers.

Cyber Risks Scenario is emerging since 2011-12 and real impact is being felt since 2014.

We have to look through contemporary historical advancements in IT Technologies and Cyber Risks.

(B)  Complexities in Handling Cyber Risks:

The scope of possible losses from Cyber Risks includes NDBI Non-physical Damage Business Interruption.

This type of insured risk is detached fully form asset related property risk. The cover protects earnings even when there are events of ‘Electricity Blackouts’, Digitalization etc.Data is turning into a critical asset and such events cause significant economic damages to business. Cyber Risk can trigger events for NDBI. – Non-physical Damage Business Interruption.

First and Third Party NDBI loss events caused by Cyber Risks have a broad base.

In 2016 Swiss Re/ IBM conducted a survey of companies impacted by Cyber risk landscape covering incidences of 2014-2015-2016. The median cost of $ 200,000 of a data breach event with significantly higher aggregates of losses.

Knowledge of the full range and size of Cyber Risks is still in its ‘infancy stage’. Size of Cyber Risks and reliability of incident data are not easy to generate ‘Actuarial Estimates’.

Insurers also worry that the aggregation of Cyber Risks in an event of loss may result in billions of US$ and modelling occurrences is for more difficult even there can be threats to solvencies of Business Houses.

The main challenges in insuring Cyber Risks are………..

• Uncertainty about frequencies and severities of losses.
• Potential correlations of various Cyber Risks.

• Cyber Crimes and Cyber Terrorism.

• Malicious intents behind coordinated attacks like Ransomware
• Constantly changing threats from untreatable perpetrators of crimes.
• Many business houses using most sophisticated IT Technologies are not well prepared to deal with Cyber Risks and loss events to quantify volumes of Cyber Event losses.

• Historical Data of Cyber Loss Events is to be built up for evolving Risk Modelling.
• Business Houses and Insurance Industry leaders have to make gross investments in security technologies.

• First line of defence against Cyber Threats of concerned Business houses means Comprehensive Risk Management practices to be handled jointly by Insured, Insurer, Reinsurers and Brokers.
• It is very important that for better understanding of Cyber Risk Data base must be built from all angles. Insurers should closely study various problems and prospects of clients in dealing with Insurability of Cyber Risks.
• Insurance of Cyber Risks must help to build RESILIENCE OF BUSINESS HOUSES in an Interconnected world of It Technologies.
• Even information given by clients can be incomplete and ambiguous.

Paperless offices remain with larger blanks in interconnections of information stored in computers when breaches take place. Back-up data have their own missing links.

(C)   Some Observations of various lead underwriters Emerging Scenario of Cyber Risks from Reinsurance Week and Reinsurance Magazines from London in 2016-17:

The most recent Ransomware Attacks are something that everyone can be affected but ‘main business remains unprepared and unprotected against them’.

Up until now Cyber Insurances have typically focused on breach response, notifications and liability costs increased by companies holding high volumes of sensitive data such as healthcare providers, financial institutions and retailers.

In the recent Wannacry and Petrawrap outbreaks all have witnessed ‘Crippling Disruptions’ that can be inflicted by the ‘ransomware’ across all sectors of industries.

Even Large Scale Blue chip are globally recognized brands which are not immune.

The costs of such incidents are not limited to payments of ransom. Decrypting files or restoring data from back-ups have higher costs. All these consume valuable resources and can destroy hard-won reputation.

No business is safe from determined Hackers.

Business Houses need to engage insurers, brokers and others risk – management specialists to ensure that there are kept up-to-date in the face of this developing threat with a particulars focus on patching, back-ups and business continuity planning. These are essential to reduce damaging impacts of such ransomware events and prevent reputational damage.

Mr. Paul Gooch,

TMK UNDERWRITER.

Technologies will continue to move on and change our world at a faster space. The best option is to ‘adapt’ to it. Technology offer opportunities to analyses prospective portfolios to identify areas of underperformance and inefficiencies within the portfolio. Both Insurers and reinsurers have to analyze and understood Cyber Risk Portfolios.

TRADITIONAL METHODS OF DISTRIBUTING PRODUCTS OF INSURANCE AND REINSURANCE ARE TO GIVE WAY TO NEW TECHNOLOGICAL TRENDS OF STANDARDIZATION.

Those who embrace technology can leverage it as an ‘OPPORTUNITY’ while those who do not will most certainly see it as a ‘THREAT’.

Mr. Hans Peter Gerhardt. Group CEOP

ACR Capital Holding Pvt. Ltd.

New Technologies involving things like autonomous vehicles, drones and artificial intelligence may bring new business opportunities for the industry. At the same time, they my however disrupt the market as unexpected risks emerge and / or known risks become non-existent Technological developments, predictions of changes and vision of new opportunities to grow are all before us.

‘Cyber Risk’ is one of the emerging risks that offer growth potential to the Insurance Industry. Demand for Cyber Risk Insurances is rising amid the increasing use of social media and cloud computing. The Legal and regulatory measures against private data breach is becoming more punitive and there is growing awareness of Cyber Risk Protections. The Lloyds Platform is becoming a compelling measure for regional and local players to gain access to Cyber Risk a specially line market. – JONG – GYU WON OF KOREANRE WHO LAUNCHED SPECIAL PURPOSE SYNDICATE AT LLOYDS IN APRIL 2015.

Asia – Pacific: The Insurance Industry is facing disruptive developments. Extensive digitalization and new technologies, communication channels, new types of services and evolving customer demands are rapidly altering the ‘risk landscape’ by emerging Cyber risk.

MUNICH RE co-operates with the software company SAS and others on data analysis, simulation and predictions. By providing their clients with access to big data systems and tools for advanced analytics an opportunity is provided to collaborate with in products developments on a digital and global scale. Besides these customer’s insights, analytics and automations are essential to increase insurance margins. It enhances insurers ability to react faster with efficiency in underwriting and claims processes. These are sure to make Insurance Business Model more customer-centric. Time saved by standardization of product and processes can be best utilized on consultation and calculation of non-standard cases.

ROLAND ECKL,

MUNICH RE’S CHIEF EXCECUTIVE.

Reinsurance sector has adopted a ‘can do’ attitude to the provision of ‘Cyber Capacity’ backed by greater analytics and emergence of Cyber – specialist underwriters.

A growing number of insurers recognize that they need Cyber Capability and how to acquire expertise to insure and reinsure cyber risks.

These are sure to be rapidly increasing demands to insure and reinsure Cyber Risk locally as well as globally.

There are mature markets in London, U.S., Continental Europe and Bermuda for creation of capacity to underwrite Cyber Risks with reinsurance protection. Essentially these are to cover losses arising out of ‘disruptive incidences of cyber attacks’.

However, Reinsurers and Insurers have to co-operate with caution, calculations and claims handling technologies to successfully face the challenges and changes passed by

Automation, Artificial intelligence, Digital Data, Ransomware etc. to segregate Cyber Terrorism from Pure Risk Losses of Cyber Risks.

Mr. Luke Foord – Kelcey of

AON Benfield

ALL VISUALIZE THAT THE FUTURE OF INDUSTRY IS IN FACING CHALLENGES OF ‘CYBER RISKS’. THE GROWTH IN THE DEMAND FOR CYBER COVER WILL BE QUITE RAPID WITH GREATER PENETRATIONS LOCALLY WITHIN MARKETS AS WELL AS GLOBALLY.

Underwriters have to closely understand requirements of Corporate Clients, analyses their board room decisions and invent cyber Risk solutions! ‘UNDERWRITE CYBER RISK AFTER FULLY UNDERSTANDING CYBER RISKS’. Risk Management of Cyber Risk is to be the main area of thrust.

Everyone has to find a way or make a new one to write, underwrite and reinsure Cyber Risks to satisfy demands of clients both small and big corporate firms.

The traditional competitions in soft-market conditions, increasing frequencies and severities of all Natural Catastrophes and increasing volatility of investment environment are all akin to a perfect storm in the face of disruptions caused by Cyber Risk.

Perhaps ‘Cyber Terrorism’ can be covered only on by the creation of Market Pool and other Cyber Risks can be covered by specialized Insurance Products.

Rating Technologies must be evolved and Transfer of Rating Technologies to be achieved by a Global Co-operation of Reinsurers and Insurers and (Re) Insurance Brokers.

(D)  Growing Cyber Insurance Market:

Real evolution of Cyber Insurance Market has been from 2014 onwards. However, since 2011 Cyber Liability Insurances with small limits have their beginnings since 2011.

The Cyber Risk landscape is changing very fast and Insured business houses as well as Insurers, Reinsurers and (Re)insurance Brokers have to keep pace with fast changing Technological Developments. Technological Revolution is closely linked with (Re)insurance Market Evolutions.

First Party losses result from Cyber incidents which include forensic Investigation costs to determine cause, notifying consumers and campaigns for public awareness.

Third Party losses relate to costs of Private litigations or firms and fees.

According to Lloyds CEO Cyber Attacks cost companies around US$ 400 BLNS every year! – SIGMA Report 1/2017

Cyber Risks are evolving continually. The dynamic nature of Cyber Risks is due mainly to rapidly growing Digital Transformation, ‘Widening Resources’ and vulnerability from hyper-connectivity. The entire process of Cyber Risks evolution is full of newer types of Threats and Opportunities.Cyber Risks structures are rapidly changing and are becoming complicated.

Firms may underestimate the complexity that is created by digital technology. This is absolutely and Reinsurance Markets.

Growing Cyber Risk Market is impacted by newer technologies, rapid digitalization with global interconnectivity.

Standalone Cyber Insurance is growing in US Market as well as in U.K. / Europe. The Cyber Insurance Market is concentrated. Main players are AIG, Chubb and XL Group. 45% of Global Cyber Premium is in U.S.A.

Worldwide Cyber Risk PremiumsApproximate Projections (2015-25)

Figures in US Dollar Billions

Cyber Policy Capacity Limits from US$ 5 MLNS to 100 MLNS.

Source: SIGMA Report 1/2017

Conclusion

Cyber Risks Insurances are needed by industries Insureds are ready to share information on Cyber Risks and are willing to increase their resilience in events of Cyber Attacks like Ransomware.

Main Industries interested in Cyber Risk Insurances:

Electronics, Media, Health Care, Transportation, Banking, Telecom Infrastructures, Pharma – N- Biotech, Chemical – N- Petrol and Manufacturers of Consumer Products, Industrial Products, Auto Manufacturing, Professional services, Retail, Utilities, Hotels etc.

Cyber Insurance can be better managed by Captive Insurance Market locations like Bermuda.

It remains to be seen if Financial Reinsurance Products of ART Technologies can be utilized for Cyber Risks Reinsurances.

The future of Cyber Risk Insurance and Reinsurance will be fully dependent on rapid growth of Newer Technologies, Automation, Software Data with larger volumes and enormous values of assets.

CYBER TERRORISM related to Cyber Crimes can be better covered by Market Pools and uniformly adequate ratings. Reinsurance of Market Pools will be also becoming more effective alternative to competition among Cyber Risk Insurers.

Dr. Joachim Wenning, Chairman of the Board of Management at Munich Re has spoken words of wisdom in Reinsurance with deep insight and intuition of a Global Reinsurer at Baden Baden on 23.10.2017. Conclusion of this topic is best expressed by him.

“Cyber has become highly relevant currently and will be in future it is more complex risk and carries more accumulation risk……”

Looking at the future he said that change has arrived and that the industry could learn from other industries who have undergone technology driven changes.

“Digital ingredients will be data and technology. These ingredients will be the same for our industry. They will allow better risk assessment, they will sophisticate the front end and the way we interface with customers….”

“Those who are good at it will take a bigger share, even if the pie does not grow. We need to look at how other industries are, have or will transform. They are transforming and they couldn’t care less about how our industry is transforming…….”

“How do we profit going formed? By simplifying and speeding up for the benefit of our customers…….”

“We have to earn the ability to profit from these opportunities and will not do that without transforming our industry.”

He said that our industry has to transform the way it operates in order to access rapidly changing Business Eco-Systems and to offer “Systematic Solutions”.

Source – Reinsurance – Baden Baden Meeting

Day 2 (23.10.2017)

Author

Mr. K.L. Naik
Managing Director
Xperitus Insurance Brokers Pvt. Ltd.