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Public-private cyber reinsurance scheme called for by think tank

Out-Law News | 30 Jul 2015 | 3:06 pm | 1 min. read

A reinsurance scheme backed by both insurers and the UK government should be established to ensure the cost of cyber risk can be underwritten, a think tank has proposed.

A new report (50-page / 1.13MB PDF) by Z/Yen Group highlighted the risk of "aggregation" of insurance claims that can arise as a result of one cyber security event, but said insurers can struggle on their own to underwrite the cost of those claims. Reinsurance can help address the shortfall, it said.

"In the face of rapidly growing cyber-risk, the tools of insurance, i.e. risk management and shared learning, need to be rapidly grown and deployed," the Z/Yen Group report, which was co-sponsored by APM Group, said. "To increase the rate of learning, society needs to increase the rate of cyber cover. If society wishes to bring insurance to bear on helping to manage cyber-risk, then cyber-catastrophe reinsurance needs to be available for property damage, business interruption, and third party liabilities in order to remove blockages to rapid take-up of cyber insurance by businesses."

The report said a "public-private cyber-catastrophe reinsurance scheme" could "help insurers insure themselves to insure others". It would provide reinsurance cover to insurers "above a catastrophic loss threshold" that would be defined by the industry and government, it said.

"The benefits of such a scheme are that it provides a way to help industry, insurers, and government pull together to manage this huge risk on UK plc’s balance sheet by supporting more objective pricing of risk through premiums," the report said. "The scheme does so by encouraging appropriate information sharing, standards, and best practice alongside insurance-based incentives for investment in protection."

The government would play a facilitating role in helping establish the scheme, rather than as an underwriter. Its "oversight could help the issuance of cyber-catastrophe linked bonds", the report said.