UK government advised to be ‘first mover’ on cyber pool

The subgroup formed by the Department of Trade and Industry (DTI) to look into improving the ability of the UK to respond to systemic risks has proposed the development of a state-backed Pooling-Potential Framework (UKPPF). The proposal takes cyber as a start point, but the group behind the move says it has the potential to extend to a range of other risks with “uninsurable” tails, such as climate change and pandemics. The proposals were presented at a high-level conference organised by the DTI earlier this week. It featured speakers including Dominic Christian, global chairman of Aon Reinsurance Solutions. Julian Enoizi, outgoing CEO of Pool Re, and Bruce Carnegie-Brown, chairman of Lloyd’s. Phase 1a of the plan involves a commercial cyber pool that the subgroup says “provides a starting point, demonstrating the industry’s appetite for innovation, becoming state-backed after a systemic cyber event renders it necessary (i.e. Phase 2)”. The group says this pool would provide the underwriting ecosystem and uniform framework that would enable commercial entities to remain competitive. It would allow a more sustainable market to develop by creating a cyber underwriting and risk management ecosystem. Pooling risks would make the market more robust, reduce the volatility of claims and premium costs, and decrease the national cyber protection gap by increasing cyber insurance penetration and accompanying cybersecurity “rigour”, says the group. Phase 1b would focus on research and development (R&D) and the creation of an innovation centre. The group argues that consultancy, R&D and the innovation centre would underpin the commercial pool. The centre would be funded through the premiums and economies of scale generated by the commercial cyber pool. The group says it be a “convening power” for the UK’s world-leading academia, security services and specialist insurance market. The group advises the DTI that, as part of the design of Phase 1a, the UK government could pre-commit to support a public-private partnership (PPP). “In the event of gradual or sudden market failure (and where societal welfare is threatened), [the government would] intervene to provide liquidity and stability with the provision of a backstop,” the group states in its proposals. The group adds that a state-backed cyber pool would provide maximum resilience and competitive advantage for the UK. It would also allow the commercial market to sustainably grow and profit from cyber risk, while fulfilling public policy objectives. Above all, it would pre-empt market failure, which occurred for business interruption losses during the pandemic, and mitigate systemic impacts before they occur. Looking further ahead, the group suggests the system could be extended to help mitigate climate change risk. The group proposes the creation of a new combined insurance and infrastructure PPP offering that will allow governments to invest ex ante in climate and cyber resilience. “The combination of infrastructure-resilient services, combined with tailored insurance and finance products, would allow governments to invest in adaptation now that otherwise may be unaffordable, as well as mitigate the risks on society and the cost of expensive remediation schemes,” says the group. The group’s work is boosted by a stark message delivered by the UK's House of Lords’ Risk Assessment and Risk Planning Select Committee, which in December 2021 delivered its comprehensive report, Preparing for Extreme Risks: Building a Resilient Society. “The UK must be better at anticipating, preparing for and responding to a range of challenging risk scenarios, including those which it has never experienced before… [We] must move away from a risk management strategy, which prepares for individual risk scenarios in isolation and often ignores or fails to appreciate the interconnected nature of our society,” states the report. It continues: “No two risk scenarios will play out in the same way and many emergencies will produce cascading effects that are capable of major disruption as they rip through society. Despite the manifestation of risks being highly uncertain, attempts are made to anticipate them and plan accordingly. “[However,] we consider that generalised resilience is the right response to the threat of increasingly unpredictable risk. The government’s risk management system should change from attempting to forecast and mitigate discrete risks, towards a more holistic system of preparedness.” Meanwhile, the latest proposals from the DTI subgroup state: “The findings of the subgroup indicate that it would better to design a coordinated solution for cyber risk before a critical state is reached.” Focusing on the initial cyber effort, the cyber subgroup says the UK would find itself in a competitive advantage if it moved fast on this initiative. “There are over one hundred iterations of public-private catastrophe risk insurance programmes globally, to address resilience challenges for natural catastrophe and terrorism risks. However, industry and governments have yet to find a way to collaborate on cyber risk,” it states. “A coordinated solution now would enable the cyber insurance market to develop sustainably and for society to build resilience to systemic cyber risks. Significant growth, export, competitive advantages and resilience dividends are likely to accrue to ‘first-mover’ nations that are proactive as opposed to reactive in the cyber risk space,” it adds.

UK government advised to be ‘first mover’ on cyber pool

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