Catastrophic cyber attacks and pandemics share a common characteristic in that they present threats with the potential for no geographical boundaries. This trait removes the certainty of diversification and makes both perils difficult to model and price. They also bring elevated correlations with financial markets, raising the prospect of simultaneous shocks to the underwriting and asset sides of balance sheets, as demonstrated by COVID-19, according to a recent Reactions article by Peter Hearn, President and CEO of Guy Carpenter.
Trends around globalization and digitalization exacerbate the impact by creating interconnected vulnerabilities that transcend sectors and regions and escalate accumulations. This challenges the whole provision of insurance and reinforces the need for state involvement in finding sustainable solutions for complex systemic risks. Discussions to address this issue are continuing in several countries, but regional or global cooperation should also be explored longer-term to reflect multinational companies’ cross-country exposures and the borderless nature of the risk.
This is not to say that (re)insurers should pull back entirely. There is a crucial role for the private market to play as stakeholders, including policyholders, (re)insurers and governments, come together to develop response mechanisms for future events. Clearly, government-led backstops will be required for the more catastrophic loss scenarios, but it should fall to private risk carriers to offer accessible and affordable coverage around these facilities.