FS Club CyberCatastrophe InsuranceLinked Securities On Smart Ledgers

FS Club Cyber-Catastrophe Insurance-Linked Securities On Smart Ledgers Wednesday 3 April 2019 Pewterers’ Hall, City of London @fsclub Wi-Fi Username: Guest Wifi Password: YQCEI-ZOCDF

A Word From Our Chairman: Hugh Morris Z/Yen Associate; CEO, Chain. Zy

Introduction Financial Services Club & Long Finance Chris Skinner Chairman FS Club Michael Mainelli Co-Chairman FS Club

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Cyber-Catastrophe Insurance-Linked Securities On Smart Ledgers Michael Mainelli Executive Chairman Z/Yen Group @fsclub

Outline Evolution Catastrophe Bonds Cyber Risk Cyber-Cat and ILSs A Technical Solution Future?

Cyber World

Awake @ Night

Our Carbon Journey www. london-accord. co. uk 2011: Anticipation Groundbreaking concepts such as the “carbon bubble” and climate related food security are shared through the Accord 2019: Appreciation With over 600 Reports, contributed by more than 60 financial services organisations universities, NGOs, think tanks, and government institutions, the London Accord is the largest free to access library of ESG research in the world 2009: Exploration 2008: Consolidation Scope of the London Accord widened to encompass all ESG issues. Link made to Farsight Awards. 2006: Collaboration 20 reports donated from leading financial services organisations, which examine the role that the financial services sector could play in tackling climate change. Papers published on topics as diverse as Index-linked carbon bonds and sustainable fish 2007: Publication 800 page report launched at Mansion House, 4 months before Stern. The London Accord is used as a strategy guide by organisations around the world. 2005: Initiation Informal group meets to discuss evidence based policy.

Our Carbon Cyber Journey Cyber. Catastrophe Sam Carter and Insurance-Linked 2018 Michael Mainelli Securities On Smart Ledgers Long Finance (November 2018), 75 pages. Promoting UK Cyber Prosperity: Public-Private Cyber. Catastrophe Reinsurance Z/Yen Group, Long Finance (July 2015), 50 pages. Michael Mainelli, Chiara von 2015 Gunten and Mark Duff 2011 – cyber attack on carbon trading 1999 -

Cyber-Crime Mc. Afee 2018

2015

Cyber-Risk ♦ ♦ ♦ ♦ Dynamic, possibly systemic Borderless Difficult to trace Detection time lag Under reporting of attacks Difficult to model Rising severity and frequency of attacks Catastrophic cyber event – when? not if Cyber attacks are 10 th in top 10 global risks in terms of perceived likelihood [WEF Global Risk Landscape 2015 ]

Cyber-Terrorism One definition: “Cyberterrorism is the convergence of cyberspace and terrorism. It refers to unlawful attacks and threats of attacks against computers, networks and the information stored therein when done to intimidate or coerce a government or its people in furtherance of political or social objectives. ” (Denning, 2000: 1)

Cyber-Catastrophe

New Business Class - 2015? ♦ Standalone cyber insurance developing to fill the gap where standard policies do not cover cyber-risk ♦ Coverage depends on policies’ wording and definition of event – mostly 1 st party loss coverage ♦ Cautious underwriting approach – net lines, relatively high deductibles, low limits, high premiums

Current Status ♦ Insurance is part of the toolkit to manage cyber-risk exposure ♦ Market opportunity, e. g. EU data protection ♦ Opportunities to support insurance development and take up through Ø better disclosure of cyber-risks and events Ø adoption of standards for cyber security and resilience e. g. NIST (US), Cyber Essentials (UK), ISO 27000, CESG’s 10 steps Ø better understanding of exposure to cyber risk among large organisations in sectors of national importance q CBEST Vulnerability Testing Framework q PRA’s General Insurance Stress Test 2015

Reinsurance – 2015? ♦ Reinsurance specific for cyber-terrorism peril or for business interruption and property damage following significant cyber attack – defined by: Ø loss threshold? (possible, needs consensus) Ø severity of disruption? (needs definition) Ø government use of “cyber-terrorism” phrase? (unlikely) ♦ Government involvement Ø last resort, for catastrophic events/losses Ø beyond defined excess point – how much? £ 10 bn, £ 100 bn? £ 200 bn? Ø ‘interpretive’ based on national confidence as well as security

Cyber Reinsurance ♦ Making insurance work as a whole - shared learning & best practice, clarity, and certainty in the insurance market ♦ Supporting UK prosperity Ø resilience Ø imports and exports ♦ Such a scheme would involve: Ø agreement on standard cyber cover and wording Ø removing exclusions from standard policies Ø expanding coverage to include business interruption, property damage and bodily injury Ø more ‘objective’ pricing of premiums

Cyber-Catastrophe ILS?

Evolution - Reinsurance Risk Sharing Hugo / Loma Prieta Industrial Revolution Andrew MODELS? Great Fire of Hamburg Terrorism Swiss Re Catastrophe?

2018

Cyber Coverage Breach of privacy event Data and software loss Incident response costs Cyber extortion Business interruption Multi-media liabilities (defamation and disparagement) Regulatory and defence coverage Reputational damage Network service failure liabilities Contingent Business Interruption Liability – Technology Errors & Omissions Liability – Professional Services Errors & Omissions Financial theft & fraud Intellectual property (IP) theft Physical asset damage Death and bodily injury Cyber terrorism Liability – Directors & Officers Liability – Product and Operations Environmental damage % of Products Offering this Cover 92% 81% 73% 69% 65% 62% 46% 42% 33% 27% 23% 23% 19% 15% 12% 13% 8% 4% (Cambridge Centre for Risk Studies, 2014)

Gotcha

Business Interruption ♦ Do. S and DDo. S ♦ Cloud Outage ♦ Power Outage ♦ Telco outage ♦ GPS, Mobile, Inmarsat, …

Passing On the Risk Insurer Re-Insurer Risk ? ? ? Risk

Insurance-Linked Securities ♦ Triggering and Parametrisation ♦ Natural Catastrophe ILS’s ♦ Non-Natural-Catastrophe ILS’s ♦ Pandemic Emergency Financing ♦ Pool Re’s Terror-Linked ILS

Insurance-Linked Securities ♦ Transfer of insurance risk to the capital markets. ♦ Usually linked to natural disasters. LARGE CLIENTS, INSURERS, REINSURERs Invested amt Spread Coupon ISPV Invested amt Base return Invested amt TRUST AGREEMENT, TRIGGER MANAGER INVESTORS

A Technical Solution Domain 1 Domain 2 Domain 3 Poll Domains & Calculate Index Receiver 1 Index Receiver 2 Index Receiver 3 Publish Index

Smart Ledgers The mechanism must be: ♦ Public ♦ Trustworthy ♦ Robust ♦ Smart Ledgers: ♦ Have a super audit trail ♦ Are unalterable ♦ Use a distributed architecture

Demonstration

Tracking

The Index

Architecture

Polling

Trigger

Wanting More? Evolution Catastrophe Bonds Cyber Risk Cyber-Cat and ILSs A Technical Solution Future?

Conclusion ♦ Cyber is ‘solved’ when it’s insurable ♦ Business interested in ‘business interruption’ insurance ♦ Insurance-linked securities can accelerate information collection and regulatory acceptance ♦ Smart ledgers provide a robust system on the system of ‘insurable interest’, i. e. the internet

Panel Response John Clarke Chief Innovation Officer Insur. Technix

Questions, Comments & Answers(? )

Thank You!