Insurance Insider: Parametric Solutions in Cyber on the Up as SME Coverage Needs Grow

BI claims are notoriously difficult to manage and some insurers believe binary coverage can help.

With companies growing more dependent on digital infrastructure and cloud systems for day-to-day operations, cyber insurers are looking at parametric and agreed value solutions for business interruption (BI) claims, multiple sources in the industry said.

Parametric insurance, most commonly seen in the property sector, cuts out the claims adjustment process allowing for quicker payments for policyholders. In parametric cyber coverage, when cyberattack, system failure or cloud outage occurs, the insured is paid a predetermined amount per hour or day of downtime without the need to prove actual losses.

Though the product is not yet widely adopted by the cyber sector, sources said they expect to see an uptick within the next year as carriers and brokers seek to simplify the BI claims process, which had inefficiencies highlighted by major outages over the past year, including the CDK cyberattack.

One of the pioneers of cyber parametric insurance is Parametrix. Launched in 2019, Parametrix’s first offering was cloud outage coverage, providing indemnity to policyholders per hour of cloud service provider downtime. The company has since expanded its offerings to cover more broad BI claims with the launch of its enterprise solutions product late last year.

“One of the key issues in cyber today is BI loss. It’s very hard to quantify BI loss and no-one has managed to do it in the right way,” Jonathan Hatzor, CEO of Parametrix, said.

“It’s not that carriers are trying not to provide compensation or clients are trying to overrepresent their losses. The truth is that some losses are not covered, and it’s very hard to estimate in a reasonable time what the losses are,” Hatzor said.

“The question is, if it’s going to take years to actually get my money back, is insurance really worth it?”

Parametrix’s offerings differ from traditional cyber coverage in that they don’t indemnify ransomware payments or data breach incidents. Instead, many insureds use Parametrix as supplemental coverage to a traditional cyber policy.

“The brokers that we’re working with are building hybrid solutions, so clients are still buying the data breach part of a cyber policy, but instead of using traditional cyber business interruption coverage, they’re buying our coverage,” Hatzor said.

However, he said that some clients forgo ransomware and data breach coverage altogether, particularly companies that don’t carry major risk in that area.

Moving forward, Hatzor says he expects to see more carriers adopt parametric or “hybrid parametric” coverage.

“The market is shifting to this concept of agreed value on portions of cyber coverage,” Hatzor said. “We welcome competition,” he added. “If more companies are speaking the same language, then it becomes much easier to grow the market.”

One carrier implementing agreed value language is HSB. In March, HSB rolled out an agreed value BI endorsement offering on its CyberPro policy, which, like parametric coverage, pays a predetermined amount in the event of BI from a cyber event. The policy is currently offered to cyber clients with less than $250mn in revenue.

“It’s geared towards smaller businesses, and that’s where the need is,” Dan Law, head of cyber practice at HSB, said. “These are businesses that don’t have a robust balance sheet to stay in business in the event that they are shut down.”

Law said the endorsement came to be after a WSIA meeting where a broking client asked for a simpler solution for cyber business interruption claims.

Unlike traditional parametrics, the agreed value endorsement isn’t triggered by a specific event like a cloud outage or a Category 5 hurricane. Instead, any event that would trigger a traditional cyber BI claim will result in the agreed payout.

In addition, Law said that insureds can file a claim up to the full policy limits if actual losses appear greater than the predetermined payment, which will then go through the traditional claims process.

“It’s positive throughout the ecosystem for us,” Law said. “It helps the insured, which is everybody’s goal. It prevents the broker from getting involved in too many complex claims negotiations. And it helps the carrier pay claims more efficiently.”

Like Hatzor, Law said he believes that other insurers will follow suit in the implementation of agreed value endorsements.

“It’s a pretty solid differentiator for us in the market right now,” Law said. “It won’t stay that way. I know that other folks are developing similar language.

“I’m all for it. I think it improves the uptake and claims payment abilities of the cyber market in general.”

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