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Uncertainty over the economic costs of cyber warfare warrant “caution” by insurers and may require policies to be reworded, the head of one of the world’s largest reinsurance companies has warned.
Michel Liès, who retires this week as chief executive of Swiss Re, said cyber risks were not fully understood and could test traditional definitions of political perils such as war or terrorism.
“There is definitely a caution in the sense that we are far away from knowing exactly all the details of what may happen on the cyber front,” he told the Financial Times in an interview.
Cyber attacks could hit several organisations at once, adding to the costs. “I don’t believe that the industry has yet a perfect understanding of the accumulation potential of cyber risks.”
The future of cyber cover is one of the hottest subjects in the insurance sector with the industry divided over whether it presents an opportunity or threat. Rival reinsurer Munich Re is pushing strongly into cyber insurance.
Cyber attackers are often anonymous and their links to governments disputed, which could increase the difficulty of identifying aggressors. War risks, which are often excluded from insurance policies, are typically regarded as conflicts between nation states.
Mr Liès called for improvements “in the definition of what is aggression which can be covered or not covered by the insurance industry”.
The problems of covering cyber risks is one of a series of challenges facing the world’s reinsurance companies, which act as financial backstops for conventional insurers.
Another is the rise in alternative ways of insuring risks. These included “cat bonds”, or catastrophe bonds, which pay investors tempting interest rates — unless a catastrophe strikes and they are forced to take losses.
While “cat bonds” have increased in popularity, reinsurers such as Swiss Re and Munich Re have seen insurance prices fall and have returned funds to shareholders.
Mr Liès, who will be succeeded as Swiss Re’s boss by Christian Mumenthaler, head of its main reinsurance division, argued share buybacks were also the result of a reduced number of large-scale catastrophes.
“If after one, two, three or four years mother nature is asking for less of a dividend than in the past . . . there is a certain logic to giving money back to our shareholders.”
However, Mr Liès reckoned “cat bonds” could see outflows if claims from natural catastrophes increased — or the US Federal Reserve moved towards significant increases in official borrowing costs. “That’s the moment in which we will see the reality.”
Mr Liès saw significant expansion possibilities for insurers in protecting against natural catastrophes, pointing out that currently only about a quarter of risks were insured globally. “I believe we are not short of raw material, definitely.”
Insurers should “aim for 100 per cent” coverage of natural catastrophe risks. “Natural catastrophe is a disruption in the evolution of a country,” he argued. If the purpose of insurance was “making sure that unexpected events do not destroy your growth potential, I don’t see why we should limit ourselves in this dimension.”
Insurers and reinsurers could work more with governments to underwrite risks which posed threats to economic development, he suggested. “We cannot simply wait until everybody reaches middle class status and takes care of their own fate.”
They could also harness technology to boost coverage. Insurers could use smartphone applications such as Siri — Apple’s voice-activated assistant — to inform customers about gaps in their insurance coverage. It could, for example, tell him: “Michel, I have realised that you have a gap in your life coverage . . . I have investigated the web and for $25 a week you can simply underwrite an increase.”
Mr Liès went on: “Thirty years ago there were probably more people on this planet having insurance than mobile phones. Today there are probably more people having mobile phones than insurance. Let’s make sure we can use that.”