Cyber and natural catastrophe risks top agenda in Singapore for 2016

Late last year Jacqueline Loh, deputy managing director at the MAS, announced that it had launched an industry-wide cyber insurance test-bed project that is designed to address the limits of insurability of cyber risks. This project is led by the Nanyang Technological University (NTU) Insurance Risk and Financial Research Centre (IRFRC), based at NTU, and will be carried out in collaboration with the Agency for Science, Technology and Research (A*STAR), the insurance industry and corporates. During her presentation at the 13th Singapore International Insurance and Reinsurance Congress, Ms Loh revealed that SCOR, co-founder of the IRFRC itself in 2011, is the first founding member to join the Cyber Risk Test-bed Alliance.hideMs Loh also revealed that the MAS would support the creation of a Natural Catastrophe Data Analytics Exchange (Nat Cat DAX) for Asia Pacific, designed to expand the insurability of catastrophe risks in the region and bridge the protection gap. Founding members from the insurance industry for this initiative are re/insurers Mitsui Sumitomo Insurance Group and Renaissance Re, catastrophe modelling firm RMS and broker Aon. The cyber initiative is part of a wider effort to bridge the protection gap in Singapore and the wider Asia Pacific region, explained Ms Loh. She said that Asia continues to remain “severely underinsured”. “Many of these insurable risks are often not well understood or well developed in this region, due to a lack of risk awareness, insufficient data and nascent insurance markets. The insurance protection gap is widening inexorably,” she said. Ms Loh pointed out that close to half the world’s most underinsured countries are in Asia and, of these, half are in southeast Asia. She said that during the past two decades Asia has borne 50% of the estimated global economic cost of natural catastrophes. But less than 5% of all disaster losses in Asia are insured, compared to 40% in developed nations. “The 2008 Sichuan earthquake is a case in point. Less than 1% of the total economic costs of $125bn were insured. The disaster further left governments and taxpayers with a hefty reconstruction bill of almost $150bn after the event,” said Ms Loh. But looking ahead, it will also no longer be sufficient to just focus on traditional risks. As Asia continues to grow and become more digitally connected, new and emerging risks will arise and the government, regulatory authorities, academic bodies and all those involved in the risk management and transfer sector should be “proactive” and adapt to these needs, argued Ms Loh. “I would therefore like to challenge the industry to raise insurance penetration of traditional risks and find innovative ways to cast the net wider to cover more insureds and develop innovative and meaningful risk transfer products for new and emerging risks,” she said. Despite the continued importance of natural catastrophe losses and property damage, Ms Loh agreed with the latest Risk Barometer report published by Allianz Global Corporate & Specialty, that the focus has shifted to intangible risks. “The rapidly changing global landscape has given rise to new and emerging risks, which are mostly intangible, such as cyber, liability, supply chain and reputation,” she said. “Cyber is the new catastrophe, estimated to cost the global economy between $300bn–$1tn annually. This is much higher compared to the average annual cost of natural disasters at $200bn. More than just the burden of cost, cyber risks often bring about much embarrassment and reputational damage to the company and its clients,” said Ms Loh. Cyber risks are, however, not adequately prepared for at present and their associated costs and impact are underestimated, she said. Ms Loh said a large majority of businesses believe cyber risks are still not fully understood, and that risk readiness for cyber risk may have been “vastly overstated”. “Challenges exist around the quantification and pricing of cyber risks and their accumulation effects. Yet such risks are the most likely to occur and carry the greatest potential impact on operation, with the leading risks in terms of impact and likelihood being reputational damage from a sensitive data breach (impact on organisation’s resiliency—79%; likelihood 79%), failure in a main IT data centre (59%; 77%) and disruption of online services due to a cyber attack (58%; 77%),” explained Ms Loh. For these reasons cyber risks actually present an “enormous” potential for insurance players—“not just to capitalise on this insufficiently tapped space, but more importantly, to play a vital risk management role for the wider society,” explained the regulator. She said that rising awareness of cyber exposures, as well as the forces of regulatory change, will underpin the rapid growth of cyber insurance. It is estimated that the cyber insurance market will grow 30% per annum to $20bn in annual premiums by 2025, according to Ms Loh. Companies are increasingly focusing on cyber security issues. Ms Loh said that some 63% of boards today actively address computer and information security, up from 33% in 2012. “The sharp increase is likely driven by recent high profile and well publicised cyber incidents,” she said. Also, governments are gearing up to address the problem, said Ms Loh. “There is a trend towards stringent data protection regimes that are backed by increasing levels of liabilities such as more notifications and significant fines for data breaches. The US, Hong Kong, Singapore and Australia are among those already enforcing, or looking at, new laws, while the European Union (EU) is looking to harmonise pan-European data protection laws across the EU member states,” explained Ms Loh. The problem is that as technology and the users—or abusers—of technology become smarter, the extent and impact of cyber breaches will also rise. Ms Loh said businesses must prepare for this new era of cyber risks and recognise that cyber insurance should be a critical component in a comprehensive risk management strategy. This is why the MAS supports the Cyber Risk Test-bed project. “This will promote both the demand for and supply of insurance coverage, as well as tackling the difficulties that arise when nurturing new and emerging lines,” said Ms Loh. These difficulties are, on the supply side, a lack of loss and claims data that underpins an effective and accurate risk pricing model. On the demand side, a lack of awareness as cyber risk is new and emerging and exposures are therefore difficult to understand and quantify. And, finally, there is insufficient technical expertise to underwrite such complex risks, said Ms Loh. The regulator explained that the test-bed project—led by the IRFRC in collaboration with A*STAR, the insurance industry and corporates—will seek to address the limits of insurability of cyber risks in three ways. These are: The creation of a common data-sharing platform that will encourage pooling of not just insurers’ claims data, but also corporates’ potential loss data simulated through hypothetical events; The common approach will help corporates understand their potential exposures and losses; The players on the platform will be able to come together to establish industry standards on clear-cut definitions of cyber risks, coverage limits and terms and conditions. A similarly joined-up approach that is as much focused on risk management as risk transfer is also needed for natural catastrophe risk and hence the launch of the Nat Cat DAX, said Ms Loh. “Led by the NTU Institute for Catastrophe Risk Management in collaboration with A*STAR and the industry, this common data analytics platform will enable industry to pool insurable claims data. More importantly, this platform will unlock new economic exposure and loss datasets through the use of new technologies such as satellites, remote sensors and drones,” explained Ms Loh. “With a comprehensive and integrated economic and insurance database, this will form a strong data backbone for the industry to not only underwrite traditional reinsurance better, but also to catalyse new product innovation, such as government pools and alternative risk transfer products, which will push the boundaries of insurability further,” she continued. “It gives me great pleasure to announce the formation of the Nat Cat DAX Alliance, in collaboration with pioneer industry founding members Mitsui Sumitomo Insurance Group, Renaissance Re, RMS and Aon. I urge the industry to be a part of this collaborative initiative, as we partner together to increase the availability of quality data, enhance the underwriting process, and spur collective market analytics and innovation,” she concluded.

Cyber and natural catastrophe risks top agenda in Singapore for 2016

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