the new zone for ILS?
New opportunities and challenges are on the horizon as the ILS sector
looks to help manage everything from cyber risk to cryptocurrency and
intangible assets, says Peter Dunlop at Walkers Bermuda.
According to most panels on the ILS conference circuit the answer
to that question is “cyber insurance”. Without doubt, cyber insurance
will continue to grow in its application and demand, but is cyber
insurance truly a good fit for ILS? Will it provide the return to
investors that has been missing from property catastrophe risks these
last two years?
What is cyber insurance?
Cyber insurance is not new. Losses from cyber events were first
asserted through errors & omissions policies without those coverages
specifying that they covered “cyber” losses. In response, standalone
cyber policies were developed in the late 1990s from those professional
liability coverages and have increased in sophistication and demand
commensurately with the growth of the technology industry.
Cyber insurance began as a relatively narrow coverage, covering
first party costs of investigation and remediation caused by data
breaches or cyber events. Loss data was scarce and rates on line were
high, while pricing in traditional classes was decreasing.
Now, as cyber insurance—both first party and third party—has
become de rigueur, the market has softened. Coverage terms have
broadened while pricing remains flat.
First party coverage
Today, first party coverages include hacking, cybercrime, damage
to electronic data, increased costs, and/or loss of income similar to
business interruption losses, cyber extortion, cyber terrorism, and
crisis management damage.
Bermuda has a long history of innovation in the insurance
space. Led by pioneers Fred Reiss, Bob Clements and others,
Bermuda was the first to develop the captive insurance
model in the 1960s and a solution to the US casualty crisis
of the 1980s.
With the implementation of the Insurance Amendment Act 2008
and the introduction of the light-touch regulated special purpose
insurer (SPI), Bermuda embraced third party capital convergence
and launched itself to pole position as the world’s leading insurancelinked
securities (ILS) marketplace.
More recently, to meet the rising tide of insurtech initiatives,
in 2018 the Bermuda Monetary Authority (BMA) launched a
temporary licence innovative insurer class for both general and longterm
business, and created the insurtech regulatory sandbox and
We in Bermuda await the implementation of the BMA’s Guidance
Note #20 on SPIs and the outcome of the consultation period for
proposals made by the BMA for a new permanent licence, nonsandbox
innovative insurer class, and a new collateralised insurer
class, with permanent capital requirements and the ability to fully
fund its liabilities via outwards reinsurance.
Meanwhile, as the losses from hurricanes Harvey, Irma and Maria
in 2017 and Typhoon Jebi and the California wildfires of 2018 creep
higher, and the ILS market wrestles with the side-effects of trapped
capital, the burning question for the ILS industry is now “what other
lines of business can ILS adapt to?”.