Cyber risk market needs to restructure product offering, says Ariel Re

The cyber risk market needs to better distinguish between attritional losses and catastrophic losses to bring clarity to the market and investors, Daniel Carr, head of cyber at Ariel Re, told Monte Carlo Today. 

Carr, who spent five years at Occam Underwriting as chief innovation officer before joining Ariel Re in 2021, said rates stabilised last year and there was an influx of capacity into the market at the beginning of the year.

Since then, there has been an increase in the frequency of incidents while carriers have reduced cessions and retained more risk. 

“We have had numerous smaller catastrophic events, which is creating uncertainty around the pricing and underwriting approach around the product. 

“We’ve now seen events that are impacting multiple insureds,” he said. “Are we really pricing for them? Is the coverage catering for that type of exposure at the front end, and is there sufficient reinsurance protection on the back end to mitigate that? 

“These are not the huge catastrophe events which makes everybody stand up,” Carr said. “There is a lot of chat around CrowdStrike in July, which was a meaningful event. But what was meaningful was its scale. 

“It also shines a light on some of the structural, foundational limitations of the cyber market now, and whether that may inhibit the appetite or ability of the market to grow to meet the future demand.”

Carr said many companies’ digital footprints had moved to being the core business technology infrastructure driving their day-to-day operations. 

“Many insurers are focused on attritional losses rather than systemic threats, and they need to develop a more structured product. 

“There’s a whole other thought process that needs to go on around the likelihood of the broader systemic incidents that could occur outside of the attritional process where it’s all running fine, but something existential happens, be that to a particular provider or something that’s much larger scale,” he explained. 

“Capital providers who wanted more stable returns could support attritional offerings from insurers.”

Keep focused

The capital structure for a systemic cyber risk was “in the traditional wheelhouse” of the reinsurance industry, Carr said. 

“It helps to retain focus for all constituent parts. That will create clearer and more structured products offerings at the front end, the back end and to capital providers,” he explained. 

Carr said capital providers who wanted more stable returns could support attritional offerings from insurers. “But then they should be evaluating and engaging in the ability of the insurers to influence and manage the dynamic risk,” he added. 

“Then at the back end, you might have others more aligned with a reinsurer’s investor profile, who are more familiar with volatility events throughout the market and capital. 

“That’s how investors tend to approach the market, so we should probably structure products and solutions that align with that, and then gravitate towards the two quite separate problems.

“There are significant material benefits from beginning to structure things differently, at least on the back end, to enable us to have the toolset to better attract capital and provide more effective products.”

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