Part Three – The Digital Revolution (Part Ten)

Economic Unit

Market Failure and the Role of Government

This situation represents a market failure, as adequate protection for the UK business community in terms of insurance and cybersecurity is not available.
When the private sector is unable to provide sufficient insurance, the government unofficially becomes the insurer of last resort.

In the event of a catastrophic cyberattack, political pressure on the government would necessitate actions that could cost billions of pounds.
A recent model from the Office for Budget Responsibility estimated the economic impact of an attack on the UK electricity network at £29 billion.
The 2023 National Risk Register listed electricity network failure as the second most likely “catastrophic” risk, after a pandemic.

Proposal for a Government-Backed Cyber Reinsurance Scheme

To give the private insurance market confidence to provide affordable and comprehensive coverage, and to shield taxpayers from the potential cost of a catastrophic cybersecurity failure, the UK Chambers of Commerce have recommended establishing a government-backed cyber reinsurance scheme.

This scheme positions the government as the insurer of last resort, meaning:

• Risk is transferred to insurance companies.

• Insurers can offer more innovative products, as they do not need to hold the capital required to cover a systemic attack.

Insurance can directly enhance business resilience:

• Policyholders can benefit from premium discounts by taking preventative measures.

A reinsurance fund not only mitigates the potential economic impact of a catastrophic attack on the UK but also reduces the recurrence of cyberattacks through prevention, which lowers cyber risk definitions and, consequently, insurance premiums.

In December 2023, the Joint Parliamentary Committee on National Security Strategy recommended:
“The government should work with the insurance sector to establish a reinsurance scheme for major cyberattacks to ensure market sustainability and accessibility.”

The government previously claimed that the private market provides sufficient coverage, but this is not true. As the number and severity of cyberattacks increase, premiums will become less affordable for businesses.

This recommendation is not unique to the UK:

• In the United States, the Treasury Department has confirmed its intention to explore public-private partnership options to create a federal backstop for catastrophic cyberattacks.

• In the UK insurance industry, companies support creating such a scheme as it allows them to expand their business and obtain greater protection from risk.

By building consensus in the insurance industry and governments worldwide, the UK must act quickly to:

• Become a global leader in cyber insurance,

• Be the safest place in the world to do business,

• Ensure resilient and sustainable economic growth.

Case Study: Models and Examples of Reinsurance Schemes

Pool Re is a mutual insurance company in the UK insurance industry that provides terrorism reinsurance.

It was created as a public-private response to market failure caused by IRA bombings in the early 1990s.
Since then, the private market for terrorism insurance has been rebuilt, providing full coverage for commercial assets for any business in the UK.

Current Scope and Operations of Pool Re:

The fund currently provides reinsurance coverage for assets and businesses in the UK valued at £2.2 trillion, including:

• Shopping centers and local retailers, airports, and electricity networks,

• Various sectors of the economy including transport, construction, energy, and more.

Through capital accumulated over the years, the scheme can cover the economic impact of terrorist events up to approximately £12 billion.

Role of Government and Guarantees:

After the £12 billion cap, the scheme is supported by government guarantees or loans, which have never been used, even after paying out more than £1 billion in claims.

By accepting the ultimate risk of a severe event, where the government is the final insurer, commercial insurers and investors are allowed to re-enter the market, stimulating innovation, enhancing resilience, and providing insurance coverage to businesses that otherwise could not have accessed it.