Research by Parametrix, the leading provider of cloud monitoring, modeling, and insurance services, and Aon, a leading global professional services firm, has found that portfolio risk of systemic cloud outage events can be reduced through geographical diversification. Cyber is thought of rightly as a risk which does not respect national borders, but the unique nature of cloud service delivery means that regionality plays a role in systemic loss events.

The finding is one of several revealed through analysis by Parametrix of Aon’s Global Industry Exposure Database. Parametrix Analytics deployed its proprietary portfolio scanning and infrastructure analysis tools to assess the performance and interdependencies of critical third-party digital services among this representative group of actual businesses. With about $8 billion of cyber risk premium reflected, the work covers more than half of the estimated global total.

It shows how losses arising from cloud outage events can be diversified within large (re)insurance portfolios. A significant level of diversification can be achieved by underwriting portfolios of company risks that span continents, or are geographically distanced within the same continent. However, writing a portfolio which covers companies of varying sizes, but within the same continent, delivers less diversification.

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“In the past few years, the cyber (re)insurance market has focused on identifying and quantifying cyber aggregation events,” says [    name    ],[     role     ] at Aon Reinsurance Solutions. “We’ve made a lot of progress in this area and have highlighted the detrimental impacts these events could have on the industry and the economy, recently demonstrated by the Crowdstrike outage. There has been less focus on how insurers and reinsurers can diversify their exposures to mitigate the effects of these events on any one portfolio, this paper aims to make headway in this conversation.” 

Sharon Haran, Head of Parametrix Analytics, says: “The mainstream belief has been that diversification of cloud risk was almost impossible to achieve. However, our portfolio modeling uncovers the clear advantages to be gained by writing a portfolio that spans the globe. We now know how to help our risk carriers manage one of the two key systemic cyber risks.”

“We have been collecting data about the cloud and how companies use it for more than five years,” he continues. “By infusing Aon’s Global Industry Exposure Database with our own understanding of companies’ cloud behavior and reliance, we have distilled some concrete insights into the potential for cloud diversification. These key insights equip the industry with the tools needed to identify and transfer the risk, through advanced reinsurance solutions and ILS transactions. ” 

The complete analysis note can be downloaded here.

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