London should drive cyber risk insurance

The London insurance-linked securities (ILS) market is perfectly positioned to become the global centre for 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).

The report could hardly be more timely, finding itself published in the wake of dread-inducing reports of attacks on the global financial system via SWIFT. “The ability of cyber terrorists to target national infrastructure, power grids and other critical assets is a real and growing threat,” said Karin Mulvihill, head of technology compliance at BNY Mellon. "This threat pervades businesses of all sizes and across all sectors.”

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,” said Paul Traynor, Pensions and Insurance Segments Leader, International, BNY Mellon. “There’s huge potential for cyber risk to be transferred to the capital markets using ILS, in a similar way to how cat bonds underwrite hurricane and earthquake risks. 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.”

Last year the UK Government started a consultation process designed to attract ILS business to the UK and maintain London’s position as a leading global hub for specialist reinsurance. The consultation process closes on 29 April 2016.

BNY Mellon’s report recommends new laws allowing the incorporation of special purpose vehicles (SPVs) onshore within the London market to offer ILS sponsors and investors more choice and potentially allow new and emerging risks to be transferred to the capital markets.