The London insurance linked-securities (ILS) market is perfectly positioned to become the global centre for cyber risk insurance, according to a report by BNY Mellon.
The report suggested that new data protection rules being implemented in the EU are expected to further drive up demand for cyber liability cover, which ILS could be used to fund.
BNY Mellon’s head of technology compliance, Karin Mulvihill, said: “The ability of cyber terrorists to target national infrastructure, power grids and other critical assets is a real and growing threat. This threat pervades businesses of all sizes and across all sectors.”
The bank’s report added that although steps have been taken to standardise cyber risk data and to design products that cater for cyber terrorism, the insurance market for physical damage and bodily injury arising from a cyber attack is nascent.
Paul Traynor, international pensions and insurance segments leader at BNY Mellon, explained that ILS can step in to provide capital.
“The capital markets can help nascent classes of insurance flourish. There’s huge potential for cyber risk to be transferred to the capital markets using ILS, in a similar way to how cat bonds underwrite hurricane and earthquake risks.”
“However, before cyber risks can be successfully securitised, significant progress is needed in aggregating and modelling the risk. This requires more collaboration between major insurers and technology experts to better understand the interdependencies between systems and the frequency of attacks.”
The BNY Mellon report recommended new laws allowing the incorporation of special purpose vehicles (SPVs) onshore within the London market to offer ILS sponsors and investors more choice, and potentially allow new emerging risks to be transferred to capital markets.
The UK government began work on modernising the country’s regulations to make way for an ‘ILS hub’ in London. Proposals were put forward for consultation, which runs until 29 April. It proposed an SPV framework in line with Solvency II.
BNY Mellon’s report also recommended tax incentives for SPVs to locate in London, and the establishment of a dedicated unit within the UK’s Prudential Regulation Authority.
Traynor added: “London's position as the undisputed global market for specialist insurance is being challenged by competition from international hubs such as Bermuda, Singapore and Dubai.”
“The development of a London ILS centre will help secure its leading status. It will also drive innovation by offering the ILS market direct access to the capital markets, not just for cyber risk but for other new areas such as pandemics, pension fund longevity risk and emerging market natural catastrophe risk.”
