CSA discounting, problems with backtesting and cyber insurance

The week on Risk.net, June 30–July 6, 2017

BOND CSA discounting causes problems for banks

CCP margin backtests can hide flaws, research finds

PRA urges insurers to act on ‘silent cyber’ risks


COMMENTARY: Cyber uncertainty

Cyber risk tops the worry list for operational risk managers around the world. Avoiding it is impossible for a modern company; accepting it is not an option; mitigating it can be at best only a partial solution – which leaves transferring. But the problems with cyber insurance are large, as the UK’s Prudential Regulatory Authority warned this week.  

For years, insurers and customers have warned cyber insurance underwriting was built on shaky foundationsLack of loss data and disagreement over the extent of coverage were among the biggest hurdles the sector faced. Despite the occasional claim of victory, the problem of sparse (and arguably irrelevant) loss data persists, and was highlighted as recently as last month at the OpRisk North America conference in New York.

As serious a problem, though, is a lack of clarity over what insurance against cyber risk actually means. Lengthy delays in payout may undermine its effectiveness as a risk mitigant from a practical point of view, if not necessarily from a capital-calculation standpoint. Payout on a cyber attack is slow enough already without an added delay from a debate or even litigation over whether the policy in question even covered it at all. The uncertain scope of cyber coverage, long a concern for insurance buyers, is now also a headache for the underwriters, with the PRA warning they should work to improve their understanding of their exposures, in particular through policies with uncertain coverage limits.

The prospect of a massive and unexpected cyber loss that may or may not qualify for a payout should have concentrated minds without the need for regulatory intervention – but the insurance industry has been slow to deal with cyber uncertainty. Questions over what liabilities the originators of securitised vehicles had wreaked havoc during the financial crisis; similar uncertainty around a critical threat today should not be tolerated.



Smaller non-financial companies would be exempt from some reporting requirements under proposed changes to the Emir European derivatives rules, saving them €350 million ($400 million) to €1.1 billion in operational costs, and €1.8 billion to €5.3 billion in fixed costs, the European Commission estimates.



“People say, ‘Oh, I can’t look at the [trading] screen anymore, it’s too fast. I don’t know what’s going on.’ But that’s like saying you get scared when you take your horse onto the highway. Highways are built assuming you have an automobile and can go 70mph. If you have that technology, they work very well. It presupposes a certain level of sophistication on your part” – Robert Almgren, Quantitative Brokers

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