Cyber on the march
The indefatigable president and CEO of ABIR tells Bermuda:Re+ILS why he believes Bermuda is well positioned to lead the development of the cyber market, and how governments must resist the temptation to erect protectionist barriers.
“Bermuda has a competitive advantage in cyber because of its legacy of agility, innovation and entrepreneurship.” John Huff, ABIR
Cyber is on its way to emerging as a mainstream, standalone product, according to John Huff, president and chief executive officer of the Association of Bermuda Insurers and Reinsurers (ABIR).
“We are marching toward standalone cyber as a product, the industry is making real progress working with both regulators and supervisors,” says Huff. “It is definitely viable as a proper standalone product.”
Cyber risk is increasingly acknowledged as a major problem for businesses around the world. The COVID-19 pandemic has pushed the issue even higher up the agenda, with offices closing down and workers logging in remotely via personal computers which often lack corporate security protections.
The market for cyber protection has been growing and many re/insurers in Bermuda and elsewhere have been scrambling to bring in digital underwriters and other expertise to beef up their offerings and capitalise on the growth that is expected in coming years.
Huff concedes there are still some questions around how coverage should be packaged, marketed and priced, which re/insurers are still working through, but he says this is normal for a relatively young business line.
“This is not a new issue and it is not exclusive to cyber, D&O has been through the same process,” he says.
“Insurance coverage tends to be driven by a government mandate, such as with US auto insurance, or from a societal, business or contractual mandate, as in the case of the need for surety insurance in construction.”
Cyber is likely to fit in the latter camp, he notes, with demand for cyber insurance being driven by increasing societal, business and contractual pressures.
Huff argues that Bermuda’s penchant for innovation gives it an advantage in developing products, which will be a particular advantage in cyber.
“Bermuda has a competitive advantage in cyber because of its legacy of agility, innovation and entrepreneurship,” he says.
“There is an opportunity for Bermuda where cyber and terrorism overlap,” Huff adds, pointing to complementary elements in the cyber and terrorism markets, especially considering the very real possibility that future terrorism attacks may take cyber form.
“There are a lot of skills that cross over between nat cat and terrorism that we have in Bermuda, such as analytics, aggregation and understanding correlations,” says Huff. “It is important to understand the political risk in both areas, and to understand private sector and government mitigation.”
Bermuda provides around 35 percent of the capacity in Pool Re, the UK government-backed terrorism reinsurance scheme, illustrating the expertise Bermudian re/insurers already have with terrorism risk. This is up from 28 percent in 2018.
“This may increase further in 2021 as others calibrate their risk appetite away from terrorism coverage,” Huff predicts.
ABIR is monitoring proposals for a government backstop for pandemic coverage with interest, with one of the main proposals currently on the table in the US modelled on the Terrorism Risk Insurance Act (TRIA).
“There are strong elements in all the current proposals in the US,” says Huff.
He says the re/insurance industry can contribute a lot in terms of its experience in modelling and analytics.
“There are some questions outstanding about what the risk-bearing role for the industry might be and whether coverage will be compulsory or voluntary,” notes Huff.
“ABIR does not have a set position on these questions but certainly its founding principles would suggest re/insurers should have some skin in the game for future pandemics—that is certainly the case with TRIA, and the expectation of many policymakers.”
More harm than good
Huff notes that ABIR members are active in 150 countries but serve as guests in those countries. It is pleased to be involved in the dialogue not just in the US but across the globe, he says.
“We would be pleased to see some similarities between the approaches taken by different countries, especially in terms of definitions and taxonomies,” Huff adds.
While government intervention is clearly welcome in some areas, such as managing terrorism and pandemic risk, governments risk doing more harm than good if they interfere with a view to protecting domestic industries, he warns.
“With increased protectionism there is always a risk of unintended consequences, with policymakers that are trying to help ending up concentrating risk, rather than diversifying it,” he says.
Bermuda has provided a quarter of a trillion dollars to customers and ceding companies in the EU and US over the last 20 years, notes Huff. Erecting barriers to prevent flows of capital would risk significantly reducing capacity for businesses looking to lay off risk.
While Huff cites protectionism as one of the biggest challenges facing the re/insurance industry, he insists ABIR’s members are in an optimistic mood, with many opportunities for growth waiting to be seized.
He emphasises the importance of the EU and the US—traditionally Bermuda’s biggest markets—as regions where it could continue to grow. Bermuda has worked hard to establish EU equivalence, he notes, and it is considered a reciprocal country by the National Association of Insurance Commissioners in the US.
There are also opportunities for growth in Bermuda as it works to fill the protection gap for natural catastrophe coverage, Huff says, particularly in emerging markets.
“RenaissanceRe is heading the Insurance Development Forum modelling group efforts to develop options that can be made available to emerging markets. This is so important, not just for insurance but for development generally.”
More broadly, Huff points to successful capital-raising efforts among re/insurers in Bermuda as evidence that investors share the view that re/insurers are well placed going forward.
Investors will welcome the hardening market as evidence that re/insurers are taking steps to address the lack of profitability in the industry. The current market hardening is likely to continue until beyond 2021, Huff warns.
“We have had many years of pricing deterioration, driven not just by COVID-19 but by social inflation and runaway juries and other behavioural trends in society,” he explains.
Investors will have noticed the industry’s performance during the COVID-19 lockdown. While many industries had to reduce or suspend services, re/insurers continued to pay claims and offer coverage, despite offices in Bermuda and around the world closing.
Huff says this showed the re/insurance industry’s investments in technology had paid off, but admitted re/insurance professionals are looking forward to getting back to traditional ways of doing business, in particular face-to-face meetings.