A false economy: Captives not the answer to cyber liability, says broker

Forming a captive insurer to cover cyber liabilities is unlikely to be cost-effective, according to US broker Woodruff Sawyer. It may work for already established entities, however.

In  an article published on the company’s website on Monday, casualty practice leader, senior vice president and partner Evan Hessel warns against forming a captive just for cyber risks.

Increased retentions, “huge premium increases”, and narrower terms are leading corporations to look to alternative solutions, including captives, noted.

“Unfortunately, starting a captive insurer for the primary purpose of insuring cyber liability is unlikely to be a cost-effective replacement for commercial cyber insurance,” he writes. “Forming a captive is not a cheap or simple transaction. Captives require substantive strategic resources, regulatory capital, and operational costs, all of which in total make traditional cyber insurance often look like a smart purchase (even at higher premiums).”

There may be an exception, however: where well-established captives of large organisations hold significant underwriting surplus generated from other coverages.

“[A]dding cyber liability may be a sensible potential strategy to mitigate the impact of a hardened cyber market,” he says.

The comments come despite a survey of Airmic members in October showing that cyber risks were the most likely new perils to be financed by captives.