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In what is a first for the industry, British insurance company Beazley has unveiled that it will be introducing catastrophe bonds (CATs) for major cyber events.
For context, a catastrophe bond or CAT is a method that insurance companies use to reduce the risk with covering major incidents such as natural disasters. The bond takes some of the financial burden off of the company and put them on investors, who in return receive attractive investment rates.
In the event of a major attack, if a client’s claims surpass US$300 million (~A$435 million), Beazley will receive a payout of US$45 million (~A$65 million).
“What that taps into is a pool that is trillions rather than hundreds of billions, and is a pathway for us to be able to hedge and grow,” said Beazley chief executive officer (CEO) Adrian Cox to the Financial Times.
Beazley’s cyber bond was placed by Gallagher Re and purchased by a range of investors including Fermat Capital Management. While Beazley did not reveal the interest rate, the company said that additional tranches could be implemented in the future.
The financial confidence means that insurance companies can continue to expand their coverage of more areas in the cyber industry.
The launch of the world’s first cyber CAT comes as at a time when the cyber climate is worsening, and cyber insurance is increasingly in demand by organisations but becoming less financially plausible for insurance companies.
Cyber payouts have increased massively, as have premiums which have surged by 28 per cent from Q4 2021 to Q1 2022, according to The Council of Insurance Agents and Brokers.
As a result, the only insurance plans available are ludicrously expensive and unattainable for many businesses. Cyber CATs are a solution to this issue.
Cox has also expressed his disagreement with Zurich CEO Mario Greco, who only recently declared that cyber attacks will one day become uninsurable.
The new bond does come with a small catch; war and state-sponsored cyber attacks would not be covered. Cox says that this generally falls outside of standard insurance anyway and is not a major caveat.
“The bits of cyber insurance that are too big for the insurance industry to take are quite specific and quite a small part of overall cyber risk,” he said.
Cyber insurance is not without its critics, who have expressed concern that coverage means companies are more readily able to pay hackers ransom requests as a way of preventing or undoing data leaks.
The Australian government has taken a stance against paying ransom requests, standing by Medibank’s decision to not pay the hackers responsible for the major attack they suffered in October.
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