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Captive Insurance for Cyberliability Has Pros and Cons

November 12, 2015

Although there are several "pros" for a captive providing cyberliability coverage, the major "con" is the lack of "good data," said speakers who opened the Delaware Captive Insurance Association (DCIA) 2015 Fall Forum on November 11 with a presentation titled "Hacking Out the Pros and Cons of Captive Cyber Liability Insurance."

Ernst & Young LLP (EY) senior managers James Bulkowski and Mark Millard indicated that cyberliability insurance premium volume doubled between 2013 and 2014 to more than $2 billion. They said there are around 50 insurance markets that currently provide some form of cyberliability coverage, and less than 1 percent of captive insurance companies provide the coverage.

For both captives and traditional commercial insurers interested in providing cyberliability insurance, the major "con" is "good data," according to the EY team. Mr. Millard, who specializes in risk management programs, pointed out the inconsistency in data by sharing the results from two separate studies.

"Breach data is better than cost data," he said.

And while there is publicity about a few of the major cyberbreaches, he asserted that "smaller breaches are a primary concern."

The "pros" for captives providing cyberliability coverage were presented by Mr. Bulkowski, who leads EY's captive insurance service team. They include the following.

  • Providing directors and officers coverage that might protect against shareholder lawsuits for not managing cyberrisk

  • Access to and transferring risk to the reinsurance market, which currently offers higher limits than the commercial insurance market

  • The ability of the captive to offer better policy terms tailored to the needs of its owner(s)

  • Avoiding the volatility of commercial insurance and its policy terms

  • The flexibility to structure the captive program so it can fill cyberliability coverage gaps

  • The possibility of building solid captive surplus to pay for future cyberrisk losses

  • Timely payment of cyberliability claims

  • Potential state, federal, and international tax benefits

One of the issues raised by the audience during the question-and-answer period concerned the ability of a business to answer the lengthy commercial insurer underwriting questionnaires required to obtain coverage. Both Mr. Millard and Mr. Bulkowski agreed this is a "big issue." One of the Forum delegates suggested that showing what a business is doing to mitigate cyberrisk can go a long way toward obtaining favorable pricing.

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