Insurers urged to radically change approach to cyber and shift focus to risk not line of business

Insurers must rethink their approach to cyber risk insurance, according to a new research report by KPMG, which warns that the industry is currently lacking innovative solutions and is “playing catch-up” with the pace of cyber threats. The report also stresses that the scale and scope of cyber risk will have a huge effect on the insurance industry, driving fundamental changes in the way it is structured and responds to clients’ risks. KPMG notes that cyber threats have the potential to shake up traditional thinking within the insurance industry along product lines and drive fundamental changes, including breaking down traditional company structures based on underwriting class. The firm stresses that new insurance solutions must address more intangible risks posed by technology and cyber threats, including the loss of intellectual property, reputational damage and business interruption. Following discussions with insurance buyers and other industry experts, KPMG believes insurers must switch their focus from product-based cyber coverage in order to fully protect cyber risks. The risk transfer industry must also recognise that cyber threats will impact traditional lines of business such as motor, property and aviation as smart technology advances. “These aspects may seem uninsurable but more innovative approaches, such as parametric cover or sophisticated risk modelling, can help insurers provide this sort of protection,” states the report, titled: Seizing the Cyber Insurance Opportunity. Commenting on its findings, Dan Trueman, chief innovation officer and cyber unit head at Novae, said insurers need to move on from its single cyber insurance product approach. “Cyber risk is front and centre of businesses’ risk radars across every industry and in every country. The potential market is huge for those who get the products right. At Novae, we are building our capabilities to take a holistic approach to covering cyber risk as we recognise that in a digital world, cyber can’t be one product.” Insurers that lead the way in providing real solutions to protect intangible assets at risk from cyber threats will radically change the cyber insurance market, the report notes. Moreover, they would open up a source of $10bn potential income in global premiums by 2020, which at present is estimated at just $2.5bn. Those insurers that find a way of covering these intangible elements will be met with huge demand. The scale and impact of attacks in recent years has made cybersecurity a top priority for boards. One challenger bank CEO recently told KPMG: “The only things that keep me up at night are the unforeseen risks – cyber threats.” At present, cyber claims mainly cover breaches and the costs incurred from informing customers about a cyber attack or breach, but buyers are looking for more innovative cover for the growing threats. The report states: “Traditional insurance players are increasingly realising that cyber risk is much more than a data breach.” Paul Merrey, insurance partner at KPMG, added that insurers have much further to go. “Technology brings a wave of new risks and insurers are only dipping their toe in the ocean. To really get a foothold in the cyber market requires two things: finding solutions to the intangible costs and recognising that smart technology means cyber risks will emerge everywhere, including within traditional lines like property, motor and aviation. To respond to this demand, insurers need a wholesale shift in product offerings and a drastic boost to in-house cyber expertise,” he said. KMPG urged insurance companies to restructure their business around cyber risks. “Insurance companies are creating teams that focus on cyber insurance risks but we recommend that they should adapt their organisational structures to ensure that cyber is integrated into everything they do, possibly creating standalone cyber insurance centres of excellence that bring together cyber risk modelling, crisis management and digital platforms,” it said. The firm is clear that cyber could bring fundamental change in the way the insurance industry approaches risk and is structured. “Ultimately, as customers start seeing value in integrated solutions to protect against cyber incidents across all asset types, insurance companies might consider shifting their department structures away from a focus on assets (eg property, motor, aviation) to a focus on perils (eg cyber terrorism), thereby challenging the status quo of traditional insurance,” the report states. It goes on to say that insurance buyers are no longer looking for off-the-shelf cyber insurance products. “They want broader solutions that prevent incidents from happening in the first place, along with support when loss events arise. Risk assessment, prevention and crisis response could become an essential part of any customer-centric offering across most classes of business, particularly for intangible assets,” the report explains. “Cyber insurance has a unique opportunity to lead this shift from products to solutions and can be at the forefront of new and exciting customer offerings.” To fulfil this role, insurers will need to boost internal expertise and also form partnerships with third-party providers. “This should help them provide a full spectrum of services across three key categories: understanding risks, preventing risks and responding to incidents,” it adds.

Insurers urged to radically change approach to cyber and shift focus to risk not line of business

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