RANE Podcast: The Future of Cyber Insurance

Summary

In this RANE Insights podcast, Rodger Baker interviews Michael Millette, founder of Hudson Structure Capital Management, about the evolving landscape of the cyber insurance world. Millette discusses the shift from physical risk coverage to addressing intangible assets and the emergence of new risks like cyber threats and AI. He emphasizes the need for companies to adapt their insurance strategies to protect against a broadening range of risks, including those posed by climate change and the potential for deep fakes and misinformation. The conversation highlights the challenges and opportunities for the insurance industry in the 21st century.

Takeaways

• 🌐 The insurance industry is evolving to address modern risks, shifting from primarily covering physical assets to focusing on business continuity and intangible assets like intellectual property and reputation.
• 🚀 The rapid growth of the cyber insurance market reflects the increasing recognition of cyber risks, with premiums projected to reach over $25 billion by 2025.
• 🌪️ The traditional commercial insurance paradigm, developed in the 20th century, is struggling to cover the extensive and diverse risks businesses face today, especially those related to non-physical threats.
• 🏢 Business interruption insurance traditionally required physical damage for coverage, which became a significant issue during the COVID-19 pandemic when many businesses suffered without physical damage.
• 🔒 Cyber insurance covers a range of issues including data theft, ransomware, and notification costs, but the constantly changing risk landscape poses challenges for insurers and businesses.
• 🌎 The impact of climate change on supply chains and business continuity is becoming more pronounced, leading to a need for new insurance products and strategies.
• 🤖 The potential for artificial intelligence to create deep fakes and disrupt traditional notions of truth presents a new frontier of risk that the insurance industry will need to address.
• 🚗 The future of auto insurance is likely to be transformed by the rise of electric, shared, and autonomous vehicles, which could significantly reduce the need for traditional car insurance while increasing the focus on cyber risks.
• 📈 The insurance industry is responding to the increasing demand for cyber coverage by investing in modeling and attracting third-party capital to manage peak risks.
• 📊 Companies and their boards should be proactive in assessing and adapting their insurance strategies to cover emerging risks, including political violence, deep fakes, and the evolving threat landscape.
• 🌟 The conversation between boards, enterprise risk managers, and the insurance industry is crucial for understanding and preparing for the future of risk and the role of insurance in mitigating it.

Q & A

What is the main focus of the Stratfor Center for Applied Geopolitics?

The Stratfor Center for Applied Geopolitics focuses on providing geopolitical intelligence and analysis to help organizations understand and apply geopolitics to their operations.

Who is Michael Millette and what is his role in the insurance industry?

Michael Millette is the founder and managing partner of Hudson Structure Capital Management, a firm that manages nearly $4 billion in reinsurance and transport strategies. He has also served on the boards of Cyber Cube, Vault, and Gracie Point.

What was Millette's role at Goldman Sachs?

At Goldman Sachs, Michael Millette served as a partner, Global head of structure finance, and co-head of the Structured Finance Capital committee. He was one of the founders of Goldman's reinsurance, structured finance, and principal businesses.

How has the commercial insurance paradigm evolved over time?

The commercial insurance paradigm grew out of the 20th century, initially focusing on insuring physical risks. It evolved from covering fires to substantial industrial risks, with the development of reinsurance in the mid-1800s. However, with the rise of intangible assets, the industry is now facing the need to adapt to cover non-physical threats and business continuity.

What challenges did the insurance industry face during the COVID-19 pandemic?

The insurance industry faced challenges during the COVID-19 pandemic because many business interruptions did not coincide with physical damage to businesses. Policies often required proof of physical damage to collect for business interruption, which was not covered by the standard insurance forms in place.

What types of non-physical threats have emerged that the insurance industry must address?

The insurance industry must now address non-physical threats such as cyber risks, the effects of artificial intelligence, and other emerging technologies that can lead to data theft, ransomware, and reputational damage.

How is the cyber insurance market evolving?

The cyber insurance market is the fastest-growing market in insurance, with premiums having reached over $122 billion globally in 2022. It is expected to exceed $25 billion by 2025 and reach hundreds of billions of dollars by the late 2030s. The industry is working to grow cyber capacity to meet the increasing demand.

What are some of the risks that companies should consider when thinking about their insurance coverage?

Companies should consider risks related to physical assets, business continuity, supply chain disruptions, cyber threats, intellectual property, brand and reputation, and political risks. They may need to seek specialized coverage for these areas, as they are not typically included in standard commercial packages.

How can companies protect themselves against the risk of deep fakes and misinformation?

Companies can protect themselves against the risk of deep fakes and misinformation by investing in robust cybersecurity measures, fact-checking systems, and reputation management strategies. They may also need to consider specialized insurance products that cover reputational damage resulting from such incidents.

What is the impact of climate change on the insurance industry?

Climate change has led to an increase in the frequency and severity of certain types of catastrophes, such as wildfires and floods. This has resulted in higher insurance premiums and difficulty in securing homeowners insurance in catastrophe-exposed areas. Companies operating in these areas need to manage the increased cost of doing business and may need to consider relocating to less exposed locations.

How should companies assess their risk management and insurance needs?

Companies should work closely with their risk managers to inventory company risks and put in place an insurance and protection program. They should also engage in innovative thinking to anticipate future risks and adapt their insurance strategies accordingly, including considering the impact of emerging technologies and changing risk landscapes.