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Insights from Munich Re highlight the intricate relationship between data utilization and the development of insurance strategies for managing cyber risks, as well as the impact of re-underwriting ransomware as it becomes more prevalent.

The cyber insurance sector is undergoing significant evolution it was noted, especially in its response to the challenges presented by ransomware.

In the wake of a noticeable increase in ransomware claims around 2019, cyber insurers saw their loss ratios escalate dramatically – some estimates indicate nearly a fourfold increase in ransomware claims frequency from 2017 to 2020. This surge pushed many insurers’ loss ratios to or beyond the 100% threshold.

The industry then responded with significant rate hikes from 2020 to 2022, leading to a subsequent improvement in financial outcomes, which some industry experts now believe could result in future rate reductions.

Modeling the effects of rate changes on an insurer’s financial performance can provide clear insights. For instance, a hypothetical scenario outlined by Munich Re shows an insurer starting with a 150% loss ratio, but after tripling rates, this ratio could be reduced to 50%. If this insurer were to then implement a 10% rate reduction, their loss ratio would potentially increase to 56%, with another reduction possibly raising it further to 62%.

This scenario, Munich Re explained, underscores the swift impact that rate adjustments can have on financial health, particularly the compound effect of even modest rate reductions on the loss ratio and the overall bottom line.

An essential in assessing current cyber rates

The improvements observed in cyber risk results for 2022 may also be attributed to several factors, including rate adjustments, enhanced risk selection techniques, or a decrease in underlying ransomware activities.

Munich Re noted that the sustainability of these improvements, complicated by factors such as the lengthening of claim development patterns and external influences, remains uncertain.

For insurers, understanding the full impact of re-underwriting is essential to assess the adequacy of current rates. According to Munich Re, a significant portion of the observed improvements was driven by rate adjustments and reductions in ransomware attack frequencies.

However, distinguishing the impact of re-underwriting from that of reduced attack rates due to geopolitical changes is crucial. This analysis will help predict the likelihood of a resurgence in claims if geopolitical conditions shift.

Insurers use claim count triangles, which track loss frequency over time, as a foundational tool in this analysis. By focusing specifically on ransomware claim counts, insurers can obtain a clearer view of trends and measure the effectiveness of their risk selection strategies, it was stated.

Munich Re emphasized the importance of continuously quantifying and enhancing these strategies to maintain growth and profitability.

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The World Bank has issued three catastrophe bonds providing $420 million in insurance coverage to the government of Mexico for potential disasters including named storm events on the Atlantic coast and earthquakes.

These new cat bonds not only replace but also augment by $60 million the coverage provided by previous bonds.

The World Bank has placed an emphasis on Mexico’s vulnerability to natural disasters, with over 40% of its territory and nearly one-third of its population exposed to hurricanes, storms, floods, earthquakes, and volcanic eruptions.

Economically, this translates to approximately 30% of Mexico’s GDP being at risk from three or more types of hazards, and over 70% at risk from two or more.

Mexico pioneered the use of the cat bond market for risk financing in 2006, becoming the first government to do so. Since then, it has sponsored 20 cat bonds to mitigate the financial impact of natural disasters.

These bonds were issued under the International Bank for Reconstruction and Development’s (IBRD) “capital at risk” notes program, designed to transfer risks related to natural disasters from developing countries to the capital markets.

The latest issuance drew interest from 27 institutional investors globally, securing catastrophe insurance financing for Mexico for the next four years. The bond payouts, which are contingent on specific parametric criteria being met regarding the location and severity of an event, will be handled by IBRD and passed to the Mexican government through intermediaries Munich Re and Agroasemex, S.A., a state-owned insurance firm.

Jorge Familiar, vice president and treasurer of the World Bank, highlighted the partnership and its role in protecting the country from losses.

“For almost two decades, Mexico has been partnering with the World Bank to access the risk-bearing capacity of the capital markets for its disaster risk management,” he said. “The continued success of these transactions is a good example for other countries we are working with, as they consider the capital markets as a resource for financial protection against unpredictable natural events.”

The transaction was facilitated by GC Securities, Aon, and Munich Re as joint structuring agents, with GC Securities and Aon serving as joint bookrunners. AIR Worldwide provided risk modeling and calculation services.

“Munich Re congratulates and is pleased that we had the opportunity to support the Mexican Secretariat of Finance and Public Credit as well as the World Bank by structuring and acting as fronting reinsurer in order to facilitate this successful capital market risk transfer,” Andreas Müller, head of global retro and ILS at Munich Re, said.

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The European Insurance and Occupational Pensions Authority (EIOPA) has issued a supervisory statement concerning the oversight of reinsurance agreements with third-country reinsurers.

The statement emphasizes reinsurance’s role as a crucial international, cross-border business that capitalizes on global risk diversification and provides significant benefits to insurance companies. EIOPA noted the need for thorough evaluation of actual risk mitigation in these reinsurance practices.

It outlined that the primary aim of the supervisory statement is to share the potential risks associated with using reinsurers that operate under regulatory frameworks not deemed equivalent to the European Union’s Solvency II standards.

It also covers, where applicable, reinsurance arrangements involving reinsurers from third countries recognized as having equivalent standards.

In its statement, EIOPA advocated for robust and consistent supervision of such reinsurance activities without curbing their use by introducing a risk-based approach to identify and manage associated risks.

The guidelines articulate supervisory expectations in multiple aspects, such as assessing the business context of reinsurance from third countries and emphasizing the necessity for early regulatory dialogue.

The supervisory considerations detailed in the statement also include how to evaluate reinsurance agreements and the related risk management systems of insurers using third-country reinsurers. Additionally, it describes essential tools aimed at mitigating any supplementary risks that may emerge.

What does this mean for reinsurers?

According to Lexology, EIOPA’s supervisory statement sets forth key expectations across three areas:

• Insurance firms are expected to manage their reinsurance strategies effectively. This involves weighing reinsurance premiums against additional risks, the impacts on Solvency Capital Requirement, and other factors stemming from the use of third-country reinsurance. Although the statement encourages ongoing supervisory dialogue regarding third-country reinsurance, it suggests this should occur before finalizing arrangements involving substantial risk transfer, without necessarily mandating an approval process.
   
• Insurers should ensure they are capable of monitoring and controlling risks linked to the domiciles of third-country reinsurers, including legal and compliance risks, collateral risks, and default risks. Companies must incorporate principles of reinsurer selection into their policies.
   
• Firms should examine aspects such as the parties’ rights to terminate, the presence of any side letter agreements that might compromise the agreement’s effectiveness, the claims hierarchy in case of a reinsurer’s default, and the availability of collateral arrangements in such events.

Addressed to National Competent Authorities, the EIOPA statement urges application in accordance with the principle of proportionality and a risk-based approach.

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Legacy acquisition group DARAG Insurance Guernsey Limited (DIGL) has entered into a sale and purchase agreement (SPA) to acquire a re/insurance captive based in the Cayman Islands. The agreement is contingent on approval from the Cayman Islands Monetary Authority.

DIGL, part of DARAG Group, plans to integrate the newly acquired captive into its operations and subsequently reinsure the extended tail of the portfolio through DARAG Deutschland AG, its core risk carrier in Germany.

The unnamed Cayman Islands-based captive was previously owned by a large multinational corporation and includes significant UK employers’ liability exposure. DARAG noted that this acquisition marks one of the group’s larger transactions within the captive insurance realm.

Tom Booth, CEO of DARAG, commented on the deal and the opportunity it will present for the legacy group in the future.

“This transaction is further evidence of DARAG’s dominance in the captive legacy space as well as its continued interest in acquiring and managing UK EL exposure. The group is confident, given the advanced nature of a number of other attractive opportunities in its core European market, that 2024 will deliver excellent growth,” Booth said.

“We look to the future with increasing confidence as demand for our legacy solutions is plentiful, investment yields and capital efficiency continue at attractive levels and competition at the small to mid-sized end of the legacy market reduces,” he said. “DARAG’s focused and well capitalized business, helped by its newly simplified structure is particularly well placed to take advantage of these much improved market conditions.”

DARAG is an international insurance and reinsurance group specializing in the assumption of discontinued business and providing capital and operational relief solutions. Since its inception, the group has successfully executed 67 run-off transactions across 21 countries, totaling a value in excess of €1.7 billion.

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With every new day bringing new use cases, the risks and opportunities presented by generative AI (GenAI) are becoming clearer than ever.

At the crux of the balancing act of utilizing GenAI while mitigating the threats it can pose is the same factor behind its recent evolution – its accessibility. It is this which sets GenAI apart from other elements of artificial intelligence, according to Barbara Fernandez (pictured), head of Insur_space at MAPFRE.

The “conversational” nature of the technology is enabling users from any background to access super complex and sophisticated applications at their own pace and in their own natural language. The fact that you don’t need to be an expert to use the tool is a critical factor behind its rapid acceleration, she said, and this democratization is also why there have been so many surprising applications of GenAI and its capabilities to date.

The role of insurance in a GenAI-equipped future

Sharing some insights into MAPFRE’s recent report into how different scenarios can map out ‘the role of insurance in a society embracing GenAI’, she noted that it is not posing new threats but rather has the potential to escalate threats already present in other digital technologies. Take, for example, cybersecurity and fraud, she said – they’re not new challenges for the insurance industry but the democratizing aspect of GenAI is making fraud much easier to commit.

“We need to be prepared as companies but also as individuals,” she said. “For instance, today, if you’re sharing audio, you are providing data to synthesise your voice, and even 10 seconds of recording is enough… Companies in insurance also need to work on your protection but, at the end of the day, the first and last door [threats] enter through is the one you open. Everything is about awareness and having the right training, both as companies and individuals.”

Understanding the ‘addictive’ nature of new technologies

While the cyber and fraud implications of GenAI are its main threats, Fernandez highlighted that other aspects of this tool are flying somewhat under the radar. One of these is related to mental health, she said, because it’s clear that there is a growing addiction to and reliance on digital technologies. Its accessibility means GenAI is making it easier for humans to interact with machines, which could advance this addictive behaviour.

“Again, GenAI is not generating this addiction but rather increasing it,” she said. “In a specific scenario, [a person] could create a relationship with a machine, if the processes are so sophisticated that you feel you’re communicating with another person… This is an extreme scenario which would have implications for a person’s mental health. But let’s not go to that extreme. Let’s look at where we currently are, which is that we are completely connected. And the easier your life is thanks to technology, the more you want to use it.

“This addiction is something that could generate some mental health issues. Other issues relate to critical thinking because when you’re asking for a summary or specific insights from information that you’ve shared with a machine, the issue is that human beings are lazy. We tend to think the things in front of us are correct, which is very high risk.”

The power of critical thinking needs to be preserved and nurtured, she said, particularly in the context of such highly accessible digital tools. Another potential risk for companies to bear in mind is how GenAI will impact how people interact with each other and companies, which could lead to the role of organisations shifting. In the future, the number of interactions with companies may be significantly reduced, which presents a risk to those companies which currently deal directly with consumers. They need to question what their role will be in a society that embraces GenAI – and they need to start questioning that now.

How insurance companies can equip themselves for the future

As to how insurance companies can walk the tightrope of opportunity and risk presented by GenAI, Fernandez cautioned on the need to take a measured approach to the technology, and not get blown away by the hype surrounding this tool. When any technology appears, she said, companies need to deep-dive into its capabilities and test them out.

Companies also need to face that there’s a growing gap between the individual employees who are training themselves to utilise GenAI effectively, and company-wide policies around GenAI use. That gap is growing, she said, and companies need to face this if they’re going to bridge that gap because you can’t stop people using it on their personal devices – rather, the focus needs to be on training employees to understand the tool and use it properly.

“The first thing companies that want to make the most of GenAI need to face at a corporate level is the need to train employees – and that’s reskilling all employees, not just the ones deploying the algorithm or the technical team – because everybody needs to understand how this works,” she said. “The second key thing is to recognise that GenAI is useful for a lot of use cases but not every single thing.”

Fernandez’s message is clear – insurance businesses cannot afford to be shocked by the hype around GenAI but invest and test to ensure that it’s applied only where it makes sense.

HDI Global, through its subsidiary HDI Risk Consulting GmbH, has launched a new service called “Climate Risk Reporting”, designed to assist businesses in analyzing and managing location-specific physical climate risks.

The company has aligned the release of this new offering with EU Taxonomy guidelines, so companies can comply with emerging legal requirements and regulatory frameworks concerning climate risks.

The service is tailored for companies that, starting in 2024, are subject to the Corporate Sustainability Reporting Directive (CSRD) and need to align with the EU Taxonomy.

HDI Global explained that its service utilises a detailed grid that assesses about 30 potential physical climate risks, categorizing customer sites into a six-level scale based on their vulnerability.

The insurer’s service highlights specific data, such as water depths, maximum temperatures, and heatwave durations, which businesses can use to implement risk mitigation strategies at their locations. This data is also crucial for supporting investment decisions and selecting new business sites.

By partnering with Mitiga Solutions, HDI has also expanded its database with scientifically validated data, which includes projections based on widely recognized climate change models from the IPCC. This enables not only compliance with regulatory demands but also supports more precise investment due diligence and future location planning.

Dr Dirk Höring (pictured above), a member of the HDI Global SE executive board overseeing property, engineering, marine insurance, and HDI Risk Consulting, explained this new proposition and the benefits for clients.

“With our climate risk reporting service, we are setting a new standard in the insurance industry. We are proud of our approach to act as a true partner in transformation. We not only highlight risks but also provide recommendations for action on how our customers can mitigate risks and seize opportunities,” he said.

The introduction of this new service also comes at the heels of a recent major expansion for the group, with HDI Global ramping up its mid-market efforts through new services.

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The family of Paula Leeson, a deceased heiress who drowned in a swimming pool, has called on a judge to rule that she was murdered in order to prevent her husband, Donald McPherson, from receiving an inheritance from her £4.4 million will, as reported in an article by Express&Star.com

McPherson, a property developer, has denied murdering his wife and was not found guilty by a judge who stated that there was not enough evidence to guarantee a safe conviction. However, Leeson’s family want a judge to rule that McPherson had killed her so that he will not be legally entitled to benefit from the will.

Prior to Leeson’s death, McPherson took out seven “secret” life insurance policies on her, which would have been worth £3.5 million if she died, Express&Star.com reported.

However, McPherson said that he was asleep when she drowned during their holiday at a cottage in Western Denmark. Following her death, he began to transfer money from her accounts in order to pay his debts. He also later on joined a group “Widowed and Young,” which was described as “Tinder for Windows.”

Pathologists found 13 separate injuries on Leeson’s body, which were thought to be caused by being restrained or a resuscitation attempt.

Leeson’s family filed a case against him but McPherson was not present during the hearing and was believed to be living in several countries like French Polynesia and Fiji. Prosecutors accused him of making his wife’s death look like an accident and planning it beforehand.

McPherson was previously convicted of 32 criminal offences of dishonesty or fraud in New Zealand, the UK, and Germany. He married Leeson in June 2014, and she was set to inherit the family business, which she had been overseeing when she met McPherson.

The hearing is still ongoing.

CyberCube has issued a warning about the increasing threat of cyberattacks on public sector entities, especially focusing on government and election infrastructure, in anticipation of heightened vulnerabilities during the upcoming US presidential elections and other global electoral activities.

In its latest report, “Global Threat Outlook, H1 2024”, CyberCube emphasises the urgent need for government agencies to improve their cybersecurity defences, strengthen election integrity, and work closely with cybersecurity professionals to address these challenges effectively.

The report also identifies eight sectors as particularly vulnerable to cyber threats, including: telecoms, IT, education, retail, arts & entertainment, financials, services, and healthcare — the latter being the most at-risk industry according to CyberCube’s analysis.

CyberCube noted that while sectors like banking and aviation are frequently targeted, they generally maintain stronger cybersecurity measures. Conversely, industries like mining and agriculture, although less targeted, represent potential growth areas for cyber re/insurers due to their relative lack of exposure to cyber threats combined with high security standards.

William Altman, CyberCube’s cyber threat intelligence principal, highlighted the critical nature of the threat, especially with the US presidential elections around the corner.

“The public sector becomes an increasingly attractive target for malicious actors seeking to sow chaos and undermine faith in democracy. Moreover, around 64 countries plus the European Union will hold national elections this year, involving nearly half of the world’s population,” he said.

“In some cases, the same cyber threat actors attempting to meddle in the US presidential election will also be active in other countries. Given the potential for significant attacks, bolstering defenses in the public sector is paramount in 2024 and beyond,” Altman said.

Additionally, the analysis delved into the activities of state-nexus cyber threat actors from countries such as Russia, Iran, and China, assessing their potential impact on critical infrastructures. Richard DeKorte, CyberCube’s cyber security consultant, elaborated on the expected trends involving these nations.

“CyberCube foresees an escalation in the attacks perpetrated by state-nexus threat actors targeting critical infrastructure,” he said. “Specifically, Iranian state-sponsored threat actors are likely to target critical infrastructure opportunistically. Russian and Chinese state actors are expected to strategically position themselves to disrupt infrastructure in sectors crucial to the national economy and security of the US and its allies.”

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Onda, a managing general agency specialising in cyber insurance at Lloyd’s, has announced the appointment of Patrick Cannon, FCII (pictured above) as its chief claims officer.

Cannon brings extensive experience in developing and leading claims functions within the cyber insurance sector, including claims advocacy, claims preparation, and incident management. His career spans significant roles across various organizations.

He has served as the head of cyber claims at Marsh from November 2021 and previously held positions at Tokio Marine Kiln, including head of enterprise risk and casualty claims from July 2020 to October 2021.

Additionally, Cannon was involved in handling a range of cyber-related claims as well as technology errors and omissions, and intellectual property cases at Tokio Marine Kiln and earlier at Brit Insurance.

His appointment aligns with Onda’s focus on bolstering its claims handling capabilities amid growing demands in the cyber insurance market.

“I’m delighted to be joining Onda at this important time for cyber insurance. Our industry has never been better placed to deal with the increasing technological disruption faced by businesses. I look forward to being part of this growing team and this exciting new product,” Cannon said.

Alex Jomaa, Onda’s Chief Underwriting Officer, also expressed his enthusiasm about Cannon’s appointment.

“We are committed to delivering an exceptional claims experience for our customers, so we’re delighted that Patrick is joining the Onda team,” Jomaa said. “Patrick’s deep experience will be invaluable in growing our offer and his expertise further entrenches Onda as the market of choice for cyber insurance.”

Onda’s focus on bolstering its claims proposition comes amid projected growth for the sector; a recent report from OAC revealed that cyber insurance’s global gross premium volume witnessed a yearly increase exceeding 20% from 2019 to 2021, with projections indicating a surge in demand over the coming decade.

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Shares of R&Q Insurance Holdings tumbled 45% after the company said that it would report a significant pretax loss for the year, according to a MarketWatch report.

Shares at 7:45am GMT were at three pence, a drop of 2.49 pence. R&Q shares are down 95% over the past 12 months, MarketWatch reported.

R&Q said Friday that the loss was driven by rising costs and a shortfall in reserves at its legacy insurance business.

The insurer said in a news release that it expects reserves from its legacy insurance business for 2023 to tumble by 23%.

“This primarily relates to tail claim development as well as inflation and abuse claim development across the portfolio,” R&G said.

R&Q said its reserves at year-end 2023 were around $1 billion. However, it said the sale of its Sag Main corporate liabilities joint venture will reduce that to around $670 million.

R&Q said it would sell its 49% interest in the joint venture to Obra Capital Management fr $27 million in cash and $3 million in Randall & Quilter PR preference shares currently held by Obra.

“We are pleased with the strong return on our investment in the joint venture, and this agreement is in line with our objective of realising value from within our legacy insurance business,” said Jeff Hayman, R&Q chairman. “Although we believe that the corporate liabilities market continues to represent an attractive long-term opportunity, developing regulations – including potential changes around capital requirements – have reduced the strategic attractiveness of direct equity participation in joint ventures of this type for R&Q.”

R&Q will use some of the money realised from the sale to repay its revolving credit line, MarketWatch reported.

R&Q announced last year that it was selling program management business Accredited to private equity platform Onyx Partners. The European Commission approved the deal last month. R&Q said the sale would allow it to “undertake a material financial de-leveraging” and “return the capital solvency position back to target levels.”

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