News & Insights

“There’s been a lot of confusion and concern about new war clauses on cyber policies; while exclusions are never a cause for celebration, adding clarity to coverage can be. Long a murky topic, these changes may usher in a new understanding of the line between insurable and uninsurable risk in the current cyber market”

The line between insurable and uninsurable risk where conflict between sovereign states involves cyber-attacks has long been difficult to discern.  An important element of cyber coverage has been the agnostic approach to threat actors (including state sponsored/executed attacks), but combined with the war and terrorism exclusions in policies, questions remain as to when a cyber-attack becomes an act of war, and thereby uninsurable.  The recent War and Cyber Operation Exclusions introduced by the Lloyd’s Market Association (LMA) have been designed (with best intention) to better insulate the cyber market from specific systemic risk emanating from the use of cyber-attacks in the course of war/conflict.  War exclusions are commonplace in existing cyber policies (and have been for numerous years), but certain coverage conditions (i.e. carve backs for Cyber Terrorism) have long caused uncertainty as to what is an acceptable level of risk/impact the market can bear where there is far-reaching impact for state-sponsored cyber-attacks.

The LMA has introduced four versions of the War and Cyber Operations (LMA5564 – LMA5567) which will be mandated across any cyber policies written by a Lloyd’s syndicate from Apr 1 2023.  As should be expected with any new clause, there are various iterations in the market to further clarify position and ensure the language is fit for purpose (both for carriers and insureds alike) – but, there are common provisions across all versions for uniformity in position:

1.       War (whether declared or not) is excluded from coverage – this is a continuation of the existing coverage position: war is not an insurable risk in the cyber market.

2.       Exclude state-sponsored cyber-attacks that significantly impair (1) ability of state to function or (2) security capabilities of state (“impacted state”) – arguably, this is the delineation that has been missing in the cyber market; a more definitive response to “what constitutes uninsurable risk that may or may not be considered war?

3.       Clarity regarding coverage for computer systems located outside of an impacted state – serves to limit the exclusion to that which has been deemed uninsurable by virtue of the “war threshold” established above.  This provision is an important recognition that there may be other impacted organisations that exist outside of the intended targeted state.

4.       Robust basis for attribution agreement regarding state-backed cyber-attacks – This is a significant change to the functionality of cyber policies – up to now, the policies have been agnostic as to threat actor with coverage attaching whether the threat actor was state-sponsored or not, though it is important to note this position in the context of the war exclusion remained largely untested and confusing.  Attribution as an explicit coverage determinate is a new position and again seeks to create a clearer position on what constitutes uninsurable risk that may or may not be considered war.

It is important to note (1) this directive applies only to Lloyd’s of London Syndicates and (2) while markets must adhere to the provisions above (1-4), there is still flexibility for risk appetite and differentiation (for instance, allowing coverage for assets outside of the impacted state).  Though the directive does not extend to the full cyber market, it is a clear indication of the direction the market is moving and similar clauses should be expected in the broader marketplace.

As these clauses are the first iteration (and yet untested), challenges to the applicability of the exclusion in any given circumstance are very likely to occur. One such likely challenge will be proving attribution – attribution (and acceptance) can be very difficult and absolute certainty in attribution may not be feasible (especially based on public information that can be used as evidence).

While these terms may appear daunting, the goal is to provide additional clarity of coverage in a world that is increasingly reliant on technology.

McGill and Partners has been working closely with clients to help guide them through this first step  in what is likely to be a long road of policy language development, helping to provide more certainty of coverage where the exclusion is involved, ensuring cover under their programs is as broad as possible in the current market.

In a world that is increasingly more reliant on tech it can be hard to decipher whether a policy offer you the coverage you need. McGill and partners works closely with clients to help guide them through what is likely to be a long road of policy language development to ensure the coverage you need is the coverage you get, whether the exclusion is involved or not.

The simple, binary structure of the product enables capital providers to confirm pay-outs faster than traditional (re)insurance products.

Parametric (Re)insurance is an indexed based product that offers recoveries based upon pre-defined trigger events (peril, location and severity). We structure each contract on a bespoke basis to reflect the needs of our clients – we look to understand and mitigate the inherent basis risk in these products and believe they offer an attractive and complimentary alternative option to our clients. 

Parametric products are a powerful mechanism when fast and efficient recovery is needed or is preferable – the speed of pay out can mitigate or reduce loss development thereby having a positive effect for the insured. 

Capacity for structured products is flexible – meaningful limits are available to address the larger capacity challenges of our clients but also as the structuring costs are not onerous it can also be used to efficiently address smaller challenges.

The binary process, which provides clarity on loss and speed of payment, is very attractive to both insureds and cedents – certainty of position is attractive to both buyer and seller.

The parametric product creates certainty for the client and eliminates questions on whether certain assets or underlying coverages are within scope, something very topical during covid. Parametrics can often be structured and placed with minimal information and therefore underlying assets are not questioned.

For example, if a retail client suffered no Property Damage in an earthquake but suffered a Business Interruption loss due to closure of stores, the client could receive a pay-out if the severity of the earthquake was triggered.

We are currently working with clients on products that would recover in another Pandemic or suffer losses from ongoing global uncertainty.

In 2021, there were number of events including Winter Storm Uri, the European Floods and finally Hurricane Ida, which triggered more interest from clients, who sought more index-based products for Catastrophe perils. Technology Platforms and MGAs are focussed on live, as well as historical information, which is generating more robust data and enabling McGill and Partneto create more bespoke and effective structures to recommend to our clients.

New capital is also seeking more ways to get closer to the original risks and the product takes it either onto the Insurance programme or one step back via Reinsurance. Certain capital is seeking ESG focused products and as these programmes are aggregated and tailored to class and territory, the product can be tailored to the non-traditional carriers.

Our firm has established a core working group, encompassing colleagues from a multi-class background from our Insurance, Reinsurance and Capital Market teams. We have been working with both Insureds and Reinsureds, either securing single peril coverages on Insurance programmes, or designing bespoke Parametric coverage across Cedent portfolios.

We are perfectly positioned to advise on this product, as the firm works across a single P&L, providing access to clients and capacity across all teams. It enables a unique perspective on structuring, with full support from our Catastrophe and Actuarial modelling teams.

“Family first” a statement that is true for almost everyone, but something that isn’t always openly talked about or in fact encouraged within the business setting. Working long hours and often missing out on key moments in family life is commonplace when you’re constantly striving to achieve and obtain recognition in the workplace. Not, however at McGill and Partners.

I write this looking back at an unforgettable 6-month paternity leave. Six precious months spent with my new-born son Henry, 2-year-old daughter Elsie and wife Erin.

That time has allowed me to become an integral part of family life, strengthening the bond between my children and I at a critical stage in their development. The brain is the only organ not fully developed at birth and 90% of critical brain development happens in the first five years of life. Therefore, the McGill and Partners paternity leave policy has not only given me a wonderful experience and memories that I can cherish, but, quite literally, the opportunity to help create the foundations of a secure family setting that will have psychological benefits for my children for their lifetime.

Of course, those 6 months were not always easy; but it has allowed me to truly appreciate the challenges of full-time parenting. The meltdowns, the routines, the unachieved plans, the negotiations and, perhaps most of all, the patience. I have learnt a lot about myself, and it has helped me to develop various skills that will benefit every aspect of my life. Being a parent is one of the most challenging, yet rewarding jobs in the world, and I am grateful that I could be a constant part of it all during my paternity leave.

“In 2019 we established McGill and Partners with the remit to build a company that differentiates itself through its inclusive culture and leading-edge working practices, underpinned by our Contract of Trust. Our family friendly policies are an example of this, and we are delighted that so many of our colleagues, including Oliver and his family, have taken them up and enjoyed precious time with loved ones.  We are also proud of the fact that other companies in our sector are following our lead and introducing similar policies.”

Toby Sisson, Group Head of HR

It seems odd to me now, that this is time that we will never get to spend together again, building the foundation blocks for our family, but even odder that this extended period of paternity leave is not in any way common place within businesses in the UK. Having experienced it myself, all I can say now is that it really should be, and I hope that by sharing my experience it may spark a conversation in other UK businesses to perhaps consider doing the same.

It makes me very proud to be working for a company that understands the importance of family and unashamedly so. They understand that by giving us, their employees, time to enrich our family life, it not only benefits us, the employee, and our family, but it will also benefit the business in the long run, by facilitating a much healthier, happier and more productive workforce.

Thanks to McGill and Partners and my incredible team for making the last 6 months possible.