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3.1.4 Market Access and Potential Barriers
to Entry
Insurers are struggling to grow in a slow-
recovering economy, and cyber-insurance
presents an opportunity to gain market share.
But new entrants face several challenges,
including limited historical data, evolving
methods of measuring cyber-risk and a high
degree of uncertainty about the level of risk. This
section focuses on the additional drivers that
insurers must consider when deciding whether
to enter the cyber-insurance marketplace. It
also discusses current government initiatives
supporting the market’s growth.
Development of cyber-expertise
A key priority for insurers exploring the cyber-
insurance market is to ensure they have sufficient
technical expertise to understand the risks
associated with this type of underwriting and to
support new cyber-related business projects.
Access to skilled experts is important for the
success of market participants, but uncertainty
around market development makes it difficult to
find people with the skills needed to understand
the nature of cyber-risk, design contracts,
underwrite and price risk, and manage an
insurer’s risk portfolio. This shortage of skilled
experts is being addressed through training
programmes and recruitment campaigns to hire
experienced individuals. Insurers may also rely on
external expertise, as noted by respondents to a
PRA survey.
Methods of risk transfer and pooling for
insurer consideration
In the absence of actuarial/historical underwriting
data and given the difficulty in accurately
measuring risks, many insurers rely on
mechanisms to transfer their own risk.
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Reinsurance in the cyber-market is expected to
grow at a fast pace. Insurers have a strong
preference to work with reinsurers because they
can provide broader data sets of information, give
comprehensive underwriting information to support
their premium pricing process, and quantify cyber-
risks. Reinsurers have access to information on
threats and vulnerabilities and, as such, could help
reduce the gap in data availability for underwriting
and modelling cyber-risk. Reinsurers are currently
the main method of transferring risk to reduce
insurers’ exposure and losses. In Europe, quota
share treaty contracts
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appear to be the most
common type of contract used, followed by
proportional facultative reinsurance.
46, 47
Cyber-risk can also be transferred to the capital
markets using alternative risk-transfer instruments,
although using insurance-linked securities such
as catastrophe bonds, sidecars and industry-loss
warranties can be challenging. For example, while
insurance-linked security vehicles are primarily
issued to cover catastrophe risks (and, to a lesser
extent, products in other business lines), issuing
such an instrument to cover cyber-losses is difficult
due to a lack of data and modelling capabilities.
Using insurance-linked securities for cyber-risks
may also be less appealing to capital market
investors due to the unpredictability of cyber-risk
and the potential correlated impact on bonds
and equity. However, a pooling mechanism could
potentially facilitate the issuing of insurance-linked
securities for cyber-risk, supported by regulatory
measures or tax incentives to encourage risk
transfer to capital markets.
48
Some jurisdictions use consortiums or risk-pooling
mechanisms to manage insurer cyber-risk. Risk-
pooling mechanisms are instruments that can:
»
Carry a higher level of risk through
diversification, which reduces overall
uncertainty and leads to lower coverage
prices.
»
Facilitate the participation of smaller insurers
by providing access to others’ experience and
limiting risk exposure.
»
Standardise products among pool members
(who are likely covering similar risks).
»
Allow insurers to share claims experience
and reduce the data gap for underwriting and
modelling cyber-risk.
»
Allow the industry to cover cyber-events that
would otherwise be uninsurable and permit
further risk mitigation through the use of
reinsurers and capital markets.
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