Geographical diversification key to reducing portfolio risk of cloud outage events: Aon, Parametrix

Geographical diversification is key to reducing the portfolio risk of systemic cloud outage events, according to a joint report from global insurance and reinsurance broker Aon and Parametrix, a cloud monitoring, modelling, and insurance services provider.

Aon and Parametrix’s report emphasised that the July 2024 CrowdStrike Falcon/Microsoft Windows outage served as a stark reminder to insurance and risk professionals of the systemic loss potential facing cyber re/insurers.

“Large cloud providers such as Amazon Web Services and Microsoft Azure are increasing in systemic importance, as organizations across the globe from all industries migrate business processes and data to the cloud, and software applications are increasingly cloud-based,” the report added.

Parametrix Analytics portfolio-scanning and infrastructure analysis tools were used for a comprehensive look at Aon’s Global Industry Exposure Database, which reflects cyber risks representing more than $8 billion (out of an estimated $14 billion) of global premium.

“Together, we assessed the performance and interdependencies of critical third-party services in the digital supply chain to understand how losses arising from cloud outage events can be diversified within large re/insurance portfolios,” the joint report explained.

As per the two firms, 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.

Crystal Boch, US Head of Cyber Analytics at Aon’s Reinsurance Solutions, commented, “In the past few years, the cyber re/insurance market has focused on identifying and quantifying cyber aggregation events.

“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 were 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, and this paper aims to make headway in this conversation.”

Sharon Haran, Head of Parametrix Analytics, noted, “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. 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.”

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