Industry has a duty to absorb cyber threat: Munich Re
Re/insurers must make it their priority to better understand cyber risk and absorb more of this liability—serving a vital role for society and generating growth for the industry in the process, Doris Höpke, member of Munich Re’s board of management, told Baden-Baden Today.
Munich Re has pushed cyber risk to the top of its agenda at the conference in Baden-Baden this year. It was the key focus of the world’s biggest reinsurer’s annual media breakfast where it laid out the size of the problem in stark terms and confirmed that it is one of its main strategic growth areas.
Höpke highlighted the fact that cyber crime will cost the global economy around $600 billion in 2018—0.8 percent of global GDP, a figure which makes losses from natural catastrophes look small in comparison. The 10-year average for global economic losses from natural catastrophes is around $180 billion, she explained.
Things are set to get worse as the world becomes even more connected. There are now some 27 billion connected devices globally, and this is set to increase to 125 billion by 2030, Höpke said.
If digital services were to become unavailable, the market would be faced with a new type of vulnerability, where entire economies may suffer, she noted.
The risk transfer industry must respond, she said. “This as an explicit call to seriously engage in this subject, to assess the risk of cyber, to manage it and take the risk wherever we can.”
Munich Re estimates that less than 0.5 percent of cyber losses are insured; in comparison around 27 percent of natural catastrophe losses are insured.
“There is a huge protection gap, especially outside the US,” she said. “It’s not a perception gap, as the topic of cyber risk is very prominent. It’s really an execution gap.”
The global premium that explicitly relates to cyber insurance is around $4 billion a year, 80 to 90 percent of which is written in the US. Höpke believes this will grow quickly and she wants Munich Re to be a leader in this field, maintaining a market share of around 10 percent. “Some say by 2020, it will be $8 to $9 billion,” she said.
Understanding the risk
The biggest buyers of cyber insurance, representing some 90 percent of premiums, are small and medium-sized enterprises (SMEs).
“Large companies may be more likely to be targeted by attackers, but they are better protected,” Höpke noted. “SMEs are disproportionately more at risk. In relative terms, they face the biggest risk from working online and going digital. We very much focus on this target group.”
She stressed that one event can affect thousands or even millions of insureds’ policies—and have a far-reaching knock-on effect.
She explained that re/insurance can be developed for various forms of accumulation risk emanating out of cyber, such as virus and malware, data breaches, and IT service provider outages.
However, the failure of external networks such as power grids or the internet itself going down would go beyond the capacity of the insurance industry. This would have unforeseeable consequences, particularly in the dimension of business interruption, she said.
But, Höpke argued, the re/insurance industry has an obligation to get a better handle on the risk. “It is the biggest risk but we as a risk-taking industry are not able to come up with a viable solution,” she said.
She added that this risk cannot be ignored and deeper challenges such as so-called silent cyber exposures must also be addressed.
“Silent cyber has to be made non-silent,” she said. “Cyber exposure cannot be avoided by not writing cyber. One cannot circumvent the subject by simply not addressing it and doing nothing. Cyber is not a new product, and you can’t decide whether you write it or not.”
Clients are increasingly demanding coverage and expertise around cyber—and re/insurers must respond.
“You need a thorough understanding of the technology,” Höpke said. “We are investing heavily in building up underwriting and risk management capabilities so that we can properly assess new technologies and associated risks.
“We also collaborate with external partners in specific areas such as risk assessment, data and modelling, and claims management. Based on that approach, we are deploying single-risk and accumulation capacity in line with our growing expertise.”
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