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Enhanced models aid evaluation of cyber risks

computer modeling

Advances in the modeling of cyber exposures were the key drivers that enabled the emergence of capital market capacity to support cyber exposures, according to experts.

Just as the traditional catastrophe bond market relies heavily on models to evaluate risks and exposures, cyber models have improved and are being used more extensively to evaluate cyber exposure for potential coverage by the capital markets, sources said. 

Models played an important role in recent cyber transactions by Beazley PLC and Hannover Re SE by providing a baseline view of risk, said Juan Marcano, principal, alternative risk capital, in London for CyberCube Analytics Inc.

“A significant part of getting these deals over the line was to make investors feel comfortable with their exposure, which requires the use of models to understand potential outcomes,” he said. 

The models are improving, but development continues, sources said.

“Cyber modeling is improving all the time, and the market’s first cyber cat bond shows growing faith in the modeling approach,” said Theo Norris, cyber account executive, insurance-linked securities, in London for Gallagher Re. He added, though, that “we don’t hide from the fact that cyber cat modeling is more nascent and yet to be truly tested by an event.”

“The number of companies in the insurance market using cyber models is growing rapidly, as the credibility of the models has matured,” said Oliver Brew, London-based cyber practice leader, Lockton Re, a unit of Lockton Cos. LLC. Model development is a process of “continual improvements,” he said.

Parametrix Insurance Services LLC, which provides index-based insurance coverages for cloud computing downtime events, sees a role for its models and capabilities in the cyber ILS area, said Sharon Haran, Tel Aviv, Israel-based chief commercial officer at the company. 

The basic calculations and quantifications involved in transferring a client’s cyber risk to Parametrix could be adapted to an insurer or reinsurer that wants to transfer cyber exposure to the capital markets, Mr. Haran said. Parametrix’s other cloud monitoring and technical operations also fit or could be adapted, he said.