Lloyd's gets tough on cyber war carve-backs

Lloyd’s is to toughen its stance on the carve-back of cyber war risk as the corporation seeks to tackle systemic cyber risk.

Delivering Lloyd’s second-quarter market message, chief of markets, Patrick Tiernan, said a “more definitive approach” was needed in the segregation of systemic risk from core cyber covers, as he warned of the potential for downgrades and capital loadings for syndicates that do not take appropriate action.

Tiernan’s comments came amid the roll-out of a Lloyd’s requirement from March 31 to exclude liability for losses arising from any state-backed cyber attack from standalone cyber policies.

But the exclusion has been controversial and disagreement over the scope of cyber war exclusions is increasing as brokers and clients push to write some types of collateral war risk back into policies, as Insurance Day reported last month.

And in an interview with Insurance Day, CFC Underwriting chief executive, Graeme Newman, described the launch of the cyber war exclusion as a “PR disaster” amid confusion over the scope of the requirements.

Admitting the roll-out of the Lloyd’s exclusion “has not been elegant”, Tiernan insisted the segregation of systemic risk from core cyber cover was “critical to the maturing of this class”.

“Any exposure to state-backed cyber attacks or significant impairment within the core product will be assumed to equal the full policy limit, unless syndicates can demonstrate this is not the case – for example, by sub-limit”
_{Patrick Tiernan
Lloyd’s}

“While we attempted to work through the grey areas [of the exclusion] in the interest of smooth adoption, I think we've now reached the point where a more definitive approach is required,” he told senior market executives.

Tiernan said attempts to broaden the core coverage to include risks that are outside the letter of the state-backed cyber exclusion will “de facto… increase the exposure” and will require more capital.

“Any exposure to state-backed cyber attacks or significant impairment within the core product will be assumed to equal the full policy limit, unless syndicates can demonstrate this is not the case – for example, by sub-limit,” Tiernan said. 

This exposure will result in an increase in the “materiality thresholds” for syndicates under the Lloyd’s oversight framework, he continued. “Any failure to meet expectations may result in a downgrade of the syndicate or act as a barrier to achieving performance status.”

This could lead to the use of capital loadings for future business plans or “immediate action” in exceptional circumstances, Tiernan added.

“For those who want to continue to offer the broadest coverage within the core product when the adoption phase settles down, that will necessarily be outside the Lloyd’s market,” Tiernan said.

Addressing the market’s outlook, Tiernan said he expected the Lloyd’s market would enjoy “strong growth” next year despite the challenging economic and geopolitical backdrop it is facing. Tiernan said he was “confident in the market’s ability to navigate a uniquely challenging backdrop”, including the war in Ukraine, inflation at 20-year highs and above-average catastrophe losses.

“We have not reached an oasis of calm, rather we are operating in a world that has settled on a plateau of manageable chaos,” he said.

The past months had seen “no drastic reversal” in underwriting conditions compared with what was expected at the beginning of the year with rates continuing to harden in property direct and facultative (D&F) and a slowdown in financial and professional lines, Tiernan said.

“On the whole, we’re encouraged by the continued market discipline as judged through the lens of changes requested to plans,” Tiernan continued. “Exposure is slightly down compared with the original plan, driven predominantly by increased risk adjusted rate change in property.”

Growth is coming from property D&F and property treaty business, with a contraction in directors’ and officers’ and cyber business, he added.

The Lloyd’s market’s gross written premium is expected to grow 15% in 2023 to £56.7bn ($71.15bn).

“In our view, we see sustainable returns for the proximate risks in property, notwithstanding many challenges ahead, if syndicates retain control of their capacity, deployment and distribution,” Tiernan said. “However, the casualty and fin pro lines require careful consideration of the longer-term implications of the prevailing conditions.”

Lloyd’s reported an improved underwriting result in 2022 with a combined ratio of 91.9% and an attritional loss ratio of 48.4%.

“This result sets the foundation for a strong 2023 due to the shape of the Lloyd’s portfolio,” Tiernan said.