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Large-scale cyber risks may need government insurance backstop

Posted On: Mar. 1, 2017 1:53 PM CST

Corporations are generally ill-prepared to cope with cyber risks despite increased awareness, and there may be a case for a government-sponsored backstop if there is a widespread critical infrastructure disruption, says the Swiss Re Institute in a sigma study issued Wednesday.

“Cyber risks are complex to understand and calibrate, especially given the significant potential for correlated exposures,” says the study, “Cyber: getting to grips with a complex risk.” The sigma study is the first to be published under the banner of the Swiss Re Institute, Swiss Re Ltd.’s research and development unit.

But, “product and process innovation insurance will help make cyber risks more insurable and extend available cover to a wider set of policyholders,” says the study.

“Ultimately, however, the potential scale of some cyber losses could be too great for the private re/insurance sector to absorb,” particularly for “peak-loss events such as widespread disruption to critical infrastructure or networks, which could lead to significant accumulated losses,” says the study.

The study says initiatives that could boost cyber resilience include self- protection and risk prevention cyber insurance and reinsurance innovation; risk transfer to capital markets; and having governments play a supporting role.

“Thus far, government action has been limited to encouraging information capture and dissemination about cyber threats, and setting the accompanying legal framework,” says the study.

“In the long run, governments may have to step in to act as re/insurers of last resort if the full network benefits of digitalization are to be realized and not be undermined by the attendant increase in cyber hazards.”