Cyber risks at top of the list of threats for captives

Cybercrime, hacking and data breaches caused about $450 billion in damages last year, but insurance covered only a fraction of it. Only about $2.5 billion was paid in premiums to insure against computer crime. 

Although this presents an opportunity for the insurance industry, the gap is expected to widen by 2020, when the losses from cyber risks are estimated to hit $3 trillion and premiums paid will still be less than 1 percent of the economic loss. 

As a result, computer crime and cyber risks are expected to become the main emerging risks that will be underwritten by captive insurance companies, said Peter Mullen, CEO of Aon’s Global Captive and Insurance Management business at the Cayman Captive Forum last week. 

While property, general liability and workers compensation are the main risks underwritten by captives today, cyber is at top of the list of risks that are expected to be insured by captives in the next five years, according to Aon’s Global Risk Management Survey. 

Captives may be writing cyber to incubate it, or they may be writing it to access insurance capacity in the market place, but according to the survey, the number of captives writing cyber risks will increase threefold, Mr. Mullen said. 

Many cyber facilities have been launched and there is massive potential, he noted. However, identifying the risks and quantifying them is the main obstacle and a huge challenge for clients. 

The number of survey respondents that have a captive jumped from 15 percent to 18 percent since 2013, and respondents who reported having closed a captive dropped from 4 percent to 1 percent. 

Meanwhile, 6 percent said they were planning to form a captive in 2015, down from 9 percent in 2013. 

Mr. Mullen said he was slightly surprised by this result. “Our pipelines are pretty full right now. We are growing overall more in 2016 than we did in 2015. I don’t see any let off.” 

Pharma and biotech companies are the sectors most expected to create captives in the next years. “They have huge risks from their product liability risks to their clinical trial-type risks. They need captives to access additional capacity in the marketplace,” Mr. Mullen noted. 

The construction industry also has a growing need for captives as building projects are becoming more complex and are situated in more exposed places with higher risks. Technology companies are innovating faster than the insurance market can develop products for the industry. 

Most of the captive growth is expected to come from North America, and this is reflected in Aon’s books, he said. 

More than ever before, tax issues are not the factors driving the formation of captives. The traditional reasons for creating a captive in terms of cost efficiencies, reduced insurance premiums and access to the reinsurance market remain, Mr. Mullen said, but more captive owners are using the captive as a strategic management tool. 

The reason is that a lot of the efficiency work on captives has been done. They are working well, and now risk managers are asking themselves how they can get more out of their captive and the strategic ways they can be used. In Europe, strategic thinking was also forced by regulations, such as Solvency II, which sets minimum capital requirements and risk management standards for insurers in Europe, Mr. Mullen concluded. 

The Cayman Captive Forum is the largest conference in Cayman with more than 1,300 delegates, including captive owners, insurance managers and other service providers. 

Peter Mullen
Peter Mullen