The London insurance-linked securities (ILS) market should lead the way in cyber risk insurance, according to a new report from BNY Mellon, Insurance Linked Securities – Cyber Risk, Insurers and the Capital Markets (ILS represents the transfer of insurance risk to the capital markets, in the form of collateralised reinsurance and other structures).
New data protection rules coming in across the European Union are expected to further drive up demand for cyber liability cover according to BNY Mellon, a global leader in investment management and investment services. The report adds that although steps have been taken to standardise cyber risk data and to design products that cater for cyber terrorism, the insurance market for physical damage and bodily injury arising from a cyber attack is nascent.
The capital markets can help nascent classes of insurance flourish, suggests Paul Traynor, pensions and insurance segments leader, international, BNY Mellon. Huge potential exists for cyber risk to be transferred to the capital markets using ILS, in a similar way to how catatstrophe bonds underwrite hurricane and earthquake risks, he argues. However, before cyber risks can be successfully securitised, significant progress is needed in aggregating and modelling the risk. This requires more collaboration between major insurers and technology experts to better understand the interdependencies between systems and the frequency of attacks.