New perils, innovative responses: how cyber risk is teaching reinsurers to think differently

Liberty Mutual Re’s Peter Smith explores how cyber can provide lessons for other emerging perils…

The reinsurance industry is changing, and rapidly. Emerging perils, such as intellectual property (IP) coverage and cyber, have pushed the market out of its traditional comfort zone and will continue to push it further.

For new exposures across the industries we serve, be it cross-class threats such as climate change and cyber or specific perils coverage, we need to shift our approach and fundamentally change the mindset of the industry. Simply put, the industry needs to ‘get out of its own way’.

Broadening the talent pool

For risk carriers to grow, they need to stay relevant, work with broker partners and match their offering with demand from the broader economy. We need to offer products for new exposures that boards and chief risk officers are grappling with. A sign of this shift in approach is the growing (and still insufficient) pool of external talent that (re)insurers are engaging to identify, quantify and therefore ultimately price risk adequately.

Emerging perils present carriers with challenges: how to quantify exposures on intangible assets such as IP, or how to manage enterprise risk where no model exists. Unlike, say, traditional property treaty, IP underwriters have engaged with experts from both the wider industry and the legal sector to assess the value of the assets, to identify exposures and to build familiarity and understanding of the risk. But it is the market’s experience with cyber that has prompted the most significant and lasting change.

The early cyber market

In the early phases, cyber underwriters struggled to build confidence in the risk and therefore to attract sufficient capital to build a sustainable marketplace.

Traditional perils such as wind or quake have decades, if not centuries, of loss data, with dynamic and respected models that help build insurers’ and investors’ confidence in these risks. With the impact of potential losses relatively well understood, insurance structures can be transparently and adequately priced. However, even this is changing. Climate change has increased the quantum of unmodelled peril exposure and is shifting the severity, frequency and spread, with greater pace than models and pricing adjustments.

Cyber, on the other hand, lacked not only loss data and relevant models, but also expertise. Nevertheless, the sheer demand for cyber coverage meant multiple primary insurers were entering the market – but without the reinsurance capacity backing required to stabilise and capitalise the market at scale.

Maturing cyber cover

As primary cyber insurance grew, reinsurance and retro markets struggled to keep pace. The datapoints, limits and exclusions that come with more familiar perils were not there in early cyber contracts.

“The emergence of cyber hours clauses, for one, is a positive sign: it begins to put limits and caps on catastrophic risk”

This is changing, though often through some painful experiences for carriers. Recent loss history has meant that wordings, clauses and portfolio management have improved significantly, enabling reinsurance and retro players to either grow their presence or enter the market.

The emergence of cyber hours clauses, for one, is a positive sign: it begins to put limits and caps on catastrophic risk. Working with our broker partners and the primary coverage providers, we have seen the emergence of a sustainable cyber market. There is still a long way to grow to reach a point of relevance that our customers demand.

External talent will be key to its long-term functioning: at Liberty, we identified the military as a potential source of expert knowledge about cyber perils, and our recruitment strategy has been to seek external knowledge outside the (re)insurance industry.

Lessons from cyber

It has taken a sustained effort and an influx of fresh talent from industries outside our own to build a more mature cyber market. But the opportunity was and is enormous, given the ever-increasing exposures.

Reinsurers and insurers need to stay relevant – cyber is one example where emerging threats that corporates face on a day-to-day basis require a (re)insurance response. As an industry, we should take the lessons learnt from underwriting cyber – they will be relevant to future emerging perils, to quote a classic, the “unknown unknowns” that lie ahead.

Peter Smith is  executive vice president and managing director, London, at Liberty Mutual Reinsurance