30 January 2017Analysis

Captives must take a more pro-active approach to cyber

Captives can be a more effective approach for cutting costs and financing cyber risk, as long as the captive owners themselves understand their own risk profile, according to Peter Mullen, CEO of Aon Captive and Insurance Management.

Due to the unpredictable nature of cyber, and the fact there haven’t been a lot of critical infrastructure losses yet caused by the risk, it is important captive owners are pro-active in their approach of it, he said.

Aon recently came out with a new cyber programme to help tackle cyber risk.

Quoting Canadian ice skater Wayne Gretzky, Mullen said: "I skate to where the puck is going to be, not where it has been,” and the same should apply to approaching this evolving risk.

Mullen suggested that many of Aon’s clients were struggling to get their arms around cyber risk, trying to understand and quantify it.

“There are 60 markets out there all with different policy forms – so it was difficult for the brokers to build a consistent tower of coverage. There was dislocation in the rates from layer to layer. It was a combination of client need and markets conditions that drove the structure of the programme as you see it,” said Mullen.

In terms of retention captives can be a good option as they can incubate the risk under controlled circumstances, which in turn could help to make a more informed decision about how to finance it in three years’ time, for example.

“Cyber is a difficult risk anyway because of its complexity and because it keeps changing. What's difficult for clients is to understand their own risk profile. If they're going to make decisions about what to retain and what to transfer, I think its starts with them understanding their own risk profile,” Mullen said.

Cyber risk often breaks down into losses that are driven by data, and losses that are driven by property damage in business interruption as a result of a cyber-attack.

The data driven losses tend to be of a frequency nature, and the property damage in business interruption losses tend to be of a catastrophic nature, Mullen added.

He suggested that a lot of clients will tend to prefund a lot of the data-driven losses in the captive, and then the catastrophic exposure to property damage in business interruption will be pre-funded to some extent over the level of the retention.

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