London ILS market ‘must drive cyber risk insurance’

London’s insurance linked securities (ILS) market is perfectly positioned to become the global centre for cyber risk insurance, suggests BNY Mellon.

The bank’s newly-published report, entitled ‘Insurance Linked Securities – Cyber Risk, Insurers and the Capital Markets’, notes that ILS represents the transfer of insurance risk to the capital markets, in the form of collateralised reinsurance and other structures.

“The ability of cyber terrorists to target national infrastructure, power grids and other critical assets is a real and growing threat,” said Karin Mulvihill, head of technology compliance at BNY Mellon. “This threat pervades businesses of all sizes and across all sectors.”

New data protection rules coming in across the European Union (EU) are expected to further drive up demand for cyber liability cover according to BNY Mellon. The report adds that although steps have been taken to standardise cyber risk data and to design products that cater for cyber terrorism, the insurance market for physical damage and bodily injury arising from a cyber-attack is nascent.

“The capital markets can help nascent classes of insurance flourish,” said Paul Traynor, pensions and insurance segments leader, international, BNY Mellon. “There’s huge potential for cyber risk to be transferred to the capital markets using ILS, in a similar way to how catastrophe (cat bonds) underwrite hurricane and earthquake risks.

“However, before cyber risks can be successfully securitised, significant progress is needed in aggregating and modelling the risk. This requires more collaboration between major insurers and technology experts to better understand the interdependencies between systems and the frequency of attacks.”

Last year the UK government started a consultation process designed to attract ILS business to the UK and maintain London’s position as a leading global hub for specialist reinsurance. The consultation process closes later this week.

BNY Mellon’s report recommends new laws allowing the incorporation of special purpose vehicles (SPVs) onshore within the London market to offer ILS sponsors and investors more choice and potentially allow new and emerging risks to be transferred to the capital markets. In addition, the report recommends the following:

Tax incentives for SPVs to locate in London, similar to those offered in offshore ILS centres such as Bermuda and Guernsey.
A dedicated unit within the UK’s Prudential Regulation Authority (PRA) to develop close ties between the regulator and the ILS community, helping to build trust and understand what will enable swift approvals for new SPVs and other ILS instruments.
ILS, but with a London flavour. London must leverage its expertise within specialist insurance markets and position itself within Europe to offer the ILS market something different.

“London’s position as the undisputed global market for specialist insurance is being challenged by competition from international hubs such as Bermuda, Singapore and Dubai,” said Traynor.

“The development of a London ILS centre will help secure its leading status. It will also drive innovation by offering the ILS market direct access to the capital markets, not just for cyber risk but for other new areas such as pandemics, pension fund longevity risk and emerging market natural catastrophe risk.”


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