Government resists calls to fund backstop for cyber disaster losses

The government is resisting calls to set up a taxpayer-backed fund to compensate companies hit by cyber attacks that could cost billions of pounds even as concerns grow that the potential dangers are so complex that insurers are unwilling to fully cover them.

Increasing numbers of underwriters, academics and consultants say potential losses from a cyber catastrophe - such as a breach that shuts down an ecommerce system or knocks out power supplies - mean the state should intervene.

The UK government already provides a backstop for terrorism insurance but it does not cover cyber attacks.

A report into cyber insurance spearheaded by Francis Maude, cabinet office minister, to be published today estimates that insurers could face a "possible maximum loss" from a single cyber disaster of about £20bn. But it finds there is "no conclusive evidence of the need" for a government backstop "at present".

The research, conducted jointly with insurance broker Marsh, cites a failure of consensus among insurers over the need for government support, problems defining what should be covered, and a lack of data to model the risks.

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Global premium income from cyber insurance is estimated to amount to £1.5bn-£2bn a year - just 0.1 per cent of the property and casualty sector. However, insurers are wary of providing more comprehensive types of cyber cover partly because they lack an extensive claims history.

Insurers are also nervous about cyber risks because they are particularly systemic. Whereas natural disasters tend to be confined to certain areas, defects in widely used software or network architecture could put them in line for simultaneous losses globally.

The global market is dominated by data breach cover in the US, where strict rules require companies to tell individuals when their information has been compromised. Demand is expected to rise in Europe as a result of forthcoming EU data protection rules.

To facilitate information-sharing, government officials will on Monday unveil plans to set up a data pooling scheme involving the Lloyd's of London market and the Association of British Insurers.

<>Stephen Catlin, head of the largest Lloyd's of London insurer, warned last month that cyber was the "biggest, most systemic risk" he had come across in his 42-year career.

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Mark Weil, chief executive of Marsh UK, said it would be "disappointing" if the insurance industry was to resort to calling for state support.

Yet Professor Michael Mainelli of Gresham College, who chairs the technology consultancy Z/Yen, said: "We face a national risk of cyber terrorism and with a proper government-backed reinsurance scheme the insurance industry would be able to deploy the risk management tools in the same way it has to other areas - from shipping to fires to burglary to car theft."

Anthony Hess, cyber senior manager at KPMG, said such a scheme would provide "greater amounts of cover".

Mr Maude said the UK was a "natural home" to become a main centre for the global cyber insurance market given its existing IT security and insurance sectors. "Cyber security is not just a question of threats - it also represents an opportunity for the UK," he wrote in the study.

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Debate about flood cover rumbles on

As calls grow for ministers to establish a state-backed cyber security insurance fund, a debate is rumbling on about the scope of another pooling scheme being set up to cover homes at high risk of flooding.

The British Property Federation has written to Liz Truss, environment secretary, to complain that the types of property included in the scheme appeared to have been chosen "at random".

Flood Re, designed by the government and the Association of British Insurers (ABI), is being launched to ensure cover remains available to households at high risk of flooding. It will be funded by an average £10.50 levy on every policyholder.

Insurers have warned they can no longer keep their existing commitment to universal cover, partly because of a lack of investment in flood defences. Without Flood Re, about 350,000 households would struggle to find any affordable flood insurance, according to the ABI.

However, the property industry is concerned about different types of real estate excluded from the scheme.

It says the private rented sector will be unable to access affordable buildings insurance and that leaseholders will face similar problems unless they live in a block of three or fewer properties, where the freehold owner is also a resident.

"Properties [are] being chosen at random without much thought and consideration for those who are in and those who are out," says the letter, also signed by the Association of Residential Managing Agents, the Residential Landlords Association and the Leasehold Knowledge Partnership.

Insurers are hoping to have Flood Re up and running by the summer.

However, the property industry called on the government to delay implementation until the Department for Environment, Food & Rural Affairs (Defra) had researched how excluded properties would be effected.

Defra said: "We have had assurances from the Association of British Insurers that insurance for the private rented sector will continue to be available. We will continue monitoring the market."

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