In the September 2024 article, Mario Tucholke, Commercial Director DACH, discusses the advantages of parametric solutions for improving companies’ resilience to cyber risks.
By Mario Tucholke
What's next? Cyber - New developments in Parametric Risk Solutions
The risks that need to be hedged are becoming increasingly complex for all market participants. Demand is immense—not just for properties at risk, but especially for business interruption linked to global supply chains.
As a result, parametric insurance is gaining importance in the DACH region as an alternative to traditional insurance products. More customers and their brokers believe that parametric products better meet their needs in certain scenarios due to competitive pricing and the transparent certainty of coverage. Payouts are made within a few business days, avoiding the lengthy settlement processes that can take months or years. In today's economic climate, where cash flow and balance sheets are critical, this speed is a significant advantage that many customers are already taking advantage of.
To date, parametric products have been the subject of much discussion, particularly in the natural catastrophe market. Now, in the cyber market in Germany, Descartes Insurance is joining the discussion with the launch of a parametric cyber product in the German market.
New Parametric Solutions to Protect Companies Against Cyber Risks
Since the large-scale ransomware attacks of 2017 (e.g., WannaCry, NotPetya), cyber threats have consistently been among the top concerns for risk managers, insurers, and policymakers. Cyber risks are seen as diverse, rapidly evolving, and increasingly dangerous, making them difficult for all insurance players to manage.
Current figures on cyber trends reflect this sentiment: according to Comparitech data, the number of ransomware attacks worldwide rose by 500% between January 2020 and June 2023, with significant fluctuations month to month.
Background: Cyber insurance was originally developed to address increasing cyber exclusions in standard property and liability insurance. However, the ever-changing cyber threat landscape and associated claims have led to instability in pricing and the product itself. Consequently, cyber insurance claims have become even more challenging to handle, with the gap between coverage expectations and settlement practices often being wide. In standard cases, claims are typically settled within 12 to 18 months, but disputes can extend this timeline to years.
Why is Cyber Suitable for a Parametric Approach?
In recent years, parametric insurance has seen tremendous development in markets where capacity is scarce, particularly for climate and natural perils: hurricanes, earthquakes, floods, etc.
In recent years, parametric insurance has seen significant development in markets where capacity is limited, particularly for climate and natural perils such as hurricanes, earthquakes, and floods. Initially focused on climate insurance, parametric insurer Descartes Insurance is now launching parametric cyber products (first in France and now in Germany).
Traditional underwriting often predicts future losses based on past insurance claims, but this method is inadequate for products or markets where both the underlying risk and regulatory practices are highly volatile. Both cyber threats and natural hazards have surged in recent years, necessitating new risk assessment methods.
Descartes’ risk models use huge amounts of data to simulate the behavior of underlying hazards and quantify expected losses, leading to greater confidence in underwriting.
extensive data to simulate underlying hazards and quantify expected losses, leading to more confidence in underwriting.
How Does Cyber Shutdown Protection Work?
Business interruptions account for approximately 80% of cyber losses in Europe, particularly in ransomware cases, where the financial impact of business disruption due to inaccessible data or systems often far exceeds ransom payments. Additionally, crisis management costs (forensics, threat containment, IT system rebuilding) are significant contributors to losses. Both are primarily driven by the duration of a cyber incident, making “time” an ideal index for assessing losses.
The contractual definition of calculation methods is a key differentiator of parametric policies compared to traditional insurance, especially regarding business interruption. These losses are intangible and often debated: What should the reference period for generating gross margin be? How do we account for cyclicality, potential catch-up effects, contractual penalties, or extra costs due to activity interruptions? Insurers frequently employ restrictive quantification methods, diminishing coverage quality. Parametric structures address this issue proactively, with pre-agreed indemnity figured out before the policy even begins, rather than after the incident has occurred.
Parametric structures also seamlessly integrate into the insured's cyber program. They can be included alongside traditional cyber policies, as exclusions or deductible buybacks, or as part of a captive program.
Are Parametric Structures Always the Best Solution?
Parametric policies are useful as a standalone solution for companies with limited cyber liability risk. However, there is currently no parametric solution on the market for companies here cyber liability poses the greatest risk of loss. In such cases, brokers can create hybrid programs that combine parametric and traditional insurance for optimal premium distribution.
Moreover, the design of customized indemnity structures is generally more relevant for medium-sized or large companies due to the additional complexity involved. Parametric insurance is not necessarily the right approach for 100% of cases. However, it should be considered 100% percent of the time in the risk selection process.
What's Next?
In European markets, the focus is not on replacing existing coverage, but rather on how risk managers and CFOs can intelligently supplement, adapt or support existing coverage to protect balance sheets and ensure the company's ability to do business. This involves quick and straightforward claims settlement completed within just a few business days. As we approach the 2024/2025 renewal period, the question of new risk management options will increasingly arise, aiming to maximize insurance benefits while meeting company requirements in the event of a claim. This is where parametrics truly shines.
