From cyber to captives: Exploring new ways of looking at risks

Given cyber crime incidents are now estimated to cost the world economy in excess of $1trn a year – around 1% of global GDP – it perhaps should come as no surprise that cyber risk ranks as the top business peril in the Allianz Risk Barometer for 2023. The barometer is our annual survey of risk management experts around the world on the top corporate concerns in the year ahead.

Threats such as ransomware attacks, costly data breaches and the prospect of state-sponsored large-scale attacks, not only demonstrate that cyber is a key risk trend for companies but also illustrate the wider concept of a sustainable risk management approach that goes beyond traditional insurance coverage.

Following large losses, cyber insurance premium rates have increased over the past two years and underwriting criteria have tightened. In some cases, organisations have not been able to buy the limits or programmes they previously did. As a result, many buyers of cyber insurance are increasingly becoming interested in alternative risk transfer (ART) solutions, including embedding cyber risk into captives or designing individual structured solutions. This year we witnessed the first ever transfer of cyber risk to the capital markets through an insurance linked security.

While ART is attracting more interest around cyber and other emerging risks, it is still viewed by many as a complex and mysterious concept, Wider awareness and greater understanding of these solutions and approaches is needed. Ultimately, ART solutions are suitable and add value for more companies and scenarios than many risk managers may initially assume.

Simply put, ART is another way of looking at risk beyond the conventional traditional insurance model. ART provides tools allowing companies to manage risk in a holistic manner using capital markets’ techniques, risk financing and retention solutions. It is growing in popularity as multinational companies seek tailored flexibility for a growing number of risk scenarios. Examples include structured insurance – typically a multi-year and/or multi-line solution providing a combination of risk transfer and risk financing techniques. This can be particularly attractive if traditional cover is not available or is deemed too expensive.

We also see growing interest in captive solutions, including captive fronting, with companies looking at how such solutions can be utilised and optimised to both benefit their finances and protect their organisation against peak-loss scenarios. In France, recent legislation passed by the senate aims to create a more attractive environment for captives. Easing existing tax and regulatory burdens, this measure is expected to facilitate the creation of captive reinsurance companies within France in order to allow French companies to transfer and manage their risks in a more innovative and cost-effective manner.

At AGCS, we see more larger clients establishing captives or expanding them by adding new lines of coverage, such as cyber or even third-party risk from customers or suppliers. Structured ART reinsurance solutions assist captive owners in managing the volatility associated with such scenarios in an efficient manner by spreading losses over various financial years. Companies that cannot or don’t want to operate their own insurer can leverage so-called ‘virtual captives’ or structured solutions to combine the advantages of traditional risk transfer with those of risk financing.

The use of captives for risk coverage can provide various benefits that generally come with self-insurance but also additional ones. It’s an effective way to react to a hardening market, it aligns the cost of risk directly with the management of risk, and drives improved risk management and lower cost. Adding cyber, D&O or other emerging or not traditionally insurable risks to a captive programme also supports diversification. In addition, covering a proportion of a company’s exposures in a captive may improve terms of, or access to, traditional insurance cover, due to better alignment of interests and buyers really having ‘skin in the game’.

As companies navigate uncertain economic, political and climate risks, as well as long-term transformations – namely digitalisation and decarbonisation – this ultimately means that risks will change. As such, traditional insurance may not always be available or the best option, particularly if data or claims experience is not immediately available.

This is where ART comes in. Risk managers should view the ART universe, including parametric solutions, as an important element of modern, holistic risk management, and understand if and how these non-traditional approaches can be beneficial for their organisations. If there is a significant issue that keeps a risk manager awake at night, then it is worth spending time and effort on co-developing a tailored solution.

At AGCS, we are ready to serve this growing demand for ART and aim to be a provider of choice. We are investing and strengthening the team both within the ART lines of business and across the whole value chain in business-critical functions, including operations, claims and global programmes. We currently have about 100 ART specialists globally and are planning to recruit 20 more people in the ART line, and a dozen others in other functions. To be successful in this sophisticated segment of commercial insurance, you need expertise, imagination and strong relationships, and to bring it all together in a multi-disciplinary approach – and this is exactly where our expertise lies.