5 May 2022Analysis

Aon: captives could be solution to cyber/E&O risk financing

Captives play a meaningful role in the cyber risk conversation, according to the latest report from Aon.

Aon’s 2022 E&O and Cyber Market Review report says that given the deterioration in the cyber market, captives should be considered by organisations examining their cyber/E&O risk financing approach.

According to the report at their core, captives can provide short-term relief from cost pressures by reducing premium outflow while bringing longer-term program sustainability by using profits accrued to help build a more self-sufficient risk financing dynamic.

The principal benefits of this approach are essentially replacing insurer capital when it becomes overly expensive with organisational capital and concentrating the risk transfer budget on the volatility that may be otherwise intolerable to the organisation’s balance sheet.

In addition the report contains the results of a survey by Aon that suggests that risk financing maturity is on an upward trajectory, albeit still at relatively early stages.

A minority of organisations that place cyber in their captive use deterministic/stochastic modelling to support their cyber risk financing strategy, with many still reliant on management intuition or market dynamics to inform their approach.

The captive rationale also supports this and does not yet demonstrate a distinct utilisation, which is common in more immature risk classes.

According to Aon the risk community continues to strive to understand the underlying risks facing organisations while educating network security departments of the potential value of insurance and the role a captive could play within this dynamic.

The report said that: “Analysis of our cyber captive dataset demonstrates no distinct risk transfer purchasing trends or significant insurance markets, suggesting that the longer-term dynamics of captive use are yet to emerge.”