15 December 2022IT & claims management analysis

Captives could be solution for European cyber insured

European cyber insureds will look to captive market for solutions, according to a new market insight from Clyde & Co.

In the report, written by Jesús Iglesias, partner at Clyde & Co, points out that the recent creation by a group of large corporate entities of a mutual insurer to cover cyber risks hints at both the challenges faced by buyers, as well as the likely direction of travel for other cyber insureds, in the European cyber market.

In response to the volatility of cyber risks, carriers have implemented a number of exclusions and coinsurance solutions to reduce their own exposures. Some insureds have either found available coverage too restrictive for their needs or have struggled to secure coverage at any price – with some buyers rumoured to be resorting to the dangerous precedent of not renewing cover at all.

With re/insurance capacity for cyber shrinking, and alternative capital reluctant to commit to the class due to the volatility of the risks and the difficulty of squaring that risk with investors, there is an expectation that more companies will turn to captive insurance solutions to secure cover. As most of these captive entities do not have adequate vendor panels and do not provide services at the level of quality and timeliness of traditional cyber insurers, they mostly (if not all) act as reinsurers.

Buyers who feel they understand their cyber exposures better than their insurers are considering putting that premium spend into setting up captive insurers, securing as much reinsurance behind the captive as possible, and effectively insuring the risk themselves.

According to Iglesias the use of captives has seen notable growth for Spanish insurers. He concluded that while the cost of establishing a standalone captive insurer remain prohibitive to all but the largest companies, the ready availability of cell companies in offshore jurisdictions with passporting rights into the EU suggests that an increase in the use of cell captives to write cyber and other risks is highly likely.