From cyber to captives: Exploring new ways of looking at risks

Given cyber crime incidents are now estimated to cost the world economy in excess of $1trn a year – around 1% of global GDP – it perhaps should come as no surprise that cyber risk ranks as the top business peril in the Allianz Risk Barometer for 2023, our annual survey with risk management experts around the world on the top corporate concerns for the year ahead.

Threats such as ransomware attacks, costly data breaches, and the prospect of state-sponsored large-scale attacks demonstrate that cyber is not only a key risk trend for companies but also illustrates the wider concept of a sustainable risk management approach which goes beyond traditional insurance coverage.

Followng large losses, cyber insurance premium rates have increased over the past two years, and underwriting criteria have tightened. In some cases, organizations have not been able to buy the limits or programs they previously did. As a result, many buyers of cyber insurance are increasingly becoming interested in alternative risk transfer (ART) solutions including embedding cyber risk into captives or designing individual structured solutions. This year we witnessed the first ever transfer of cyber risk to the capital markets through an insurance linked security.

While ART is attracting more interest around cyber and other emerging risks, it is still viewed by many as a complex and mysterious concept and wider awareness and greater understanding of these solutions and approaches is needed. Ultimately, ART solutions are suitable and add value for more companies and scenarios than many risk managers may initially assume.

Simply put, ART is another way of looking at risk beyond the conventional traditional insurance model. ART provides tools allowing companies to manage risk in a holistic manner using capital markets’ techniques, risk financing and retention solutions. It is growing in popularity as multinational companies seek tailored flexibility for a growing number of risk scenarios. Examples include structured insurance – typically a multi-year and/or, multi-line solution providing a combination of risk transfer and risk financing techniques. This can be particularly attractive if traditional cover is not available or is deemed too expensive.

We also see growing interest in captive solutions, including captive fronting, with companies looking at how such solutions can be utilized and optimized to both benefit their finances and protect their organization against peak-loss scenarios. In France, recent legislation passed by the Senate aims to create a more attractive environment for captives. Easing existing tax and regulatory burdens, this measure is expected to facilitate the creation of captive reinsurance companies within France in order to allow French companies to transfer and manage their risks in a more innovative and cost-effective manner.

At AGCS, we see more larger clients establishing captives or expanding them by adding new lines of coverage such as cyber or even third-party risk from customers or suppliers. Structured ART reinsurance solutions assist captive owners in managing the volatility associated with such scenarios in an efficient manner by spreading losses over various financial years. Companies which cannot or don’t want to operate their own insurer can leverage so-called ‘virtual captives’ or structured solutions to combine the advantages of traditional risk transfer with those of risk financing.

The use of a captive for risk coverage can provide various benefits that generally come with self-insurance but also additional ones. It’s an effective way to react to a hardening market, it aligns the cost of risk directly with the management of risk for the company and drives improved risk management and lower cost. Adding cyber, D&O or other emerging or not traditionally insurable risks to a captive program also supports diversification. In addition, covering a proportion of a company’s exposures in a captive may improve terms of, or access to, traditional insurance cover, due to better alignment of interests, as well as a strong commitment to the insurance market to really have ‘skin in the game’.

As companies navigate uncertain economic, political and climate risks, as well as long-term transformations, namely digitalization and decarbonization, this ultimately means that risks will change. As such, traditional insurance may not always be available or the best option, particularly if data or claims experience is not immediately available.

This is where ART comes in. Risk managers should view the ART universe, including parametric solutions, as an important element of modern, holistic risk management and understand if and how these non-traditional approaches can be beneficial for their organizations. If there is a significant issue which keeps a risk manager awake at night, then that issue is worth spending time and effort on co-developing a tailored solution.

At AGCS, we are ready to serve this growing demand for ART and aim to be a provider of choice. We are investing and strengthening the team both within the ART lines of business and also across the whole value chain in business-critical functions, including operations, claims and global programs. We currently have about 100 ART specialists globally and are planning to recruit 20 more people in the ART line and also a dozen others in other functions. To be successful in this sophisticated segment of commercial insurance, you need expertise, imagination and strong relationships, and to bring it all together in a multi-disciplinary approach – and this is exactly where our expertise lies.