Cyber the fastest growing peril, will require reinsurance & ILS capital

by Artemis on August 25, 2016

Cyber risk is reportedly the fastest growing insured peril across the global property/casualty (P/C) insurance space, with the market forecast to expand to $20 billion by the year 2020. With the potential exposure so vast there’s a clear need for reinsurance capital, suggesting opportunities for ILS markets.

International ratings agency Fitch Ratings, in a new report, has revealed that during 2015 some 120 insurers reported writing cyber coverage totalling roughly $1 billion, noting reports from forecasters that the global cyber market could reach $20 billion by the year 2020, underlining the need for reinsurance capital and an opportunity for insurance-linked securities (ILS).

According to Fitch, cyber risk is the fastest growing insured peril across the P/C industry and it’s been noted by a number of market experts, executives and observers that there’s a real opportunity for the risk transfer, reinsurance and ILS community to innovate and create solutions that adequately protect against cyber threats.

A lack of historical loss data on cyber attacks, including the frequency of events, remediation costs and potential liability exposures is limited, says Fitch, resulting in an information gap that limits the pricing of cyber risk and developing sufficient protection terms for policies.

However, with the potential losses from cyber attacks so vast as the world continues to transition to a truly digital one, and interconnectedness continues to develop, there’s a real need for the market to expand and evolve in order to mitigate future losses.

With the cyber market undergoing significant growth during a period of broad uncertainties, it’s important insurers, reinsurers, and ILS players resist aggressive growth in standalone cyber coverage, warned Fitch in a report published earlier this year on the expansion into cyber.

But with profits in the global insurance and reinsurance industry remaining challenging on both sides of the balance sheet, many view it as an important growth area in terms of geography and diversification and are keen to develop solutions and offer protection.

As cyber insurance penetration increases so to will the need for reinsurance protection, which, typically results in more of an opportunity for ILS capital and features to have a meaningful impact and provide additional capacity.

Insurers will require protection against aggregation and accumulation risk, with reinsurance capital the likely source of risk transfer, but as these risks grow in the market the natural home for the tail risk will be the capital markets and ILS.

Artemis has discussed previously how the wealth of ILS and capital markets capacity and features will be required if the risk transfer world is serious about insuring the “too big to insure” range of cyber threats.

The opportunity for ILS to participate in cyber risks through retrocession, collateralised reinsurance placements, and even catastrophe bonds will likely become greater as the cyber market evolves and expands, resulting in the need for bespoke and innovative solutions and a wealth of capital.

Already ILS players are looking at cyber risk as an opportunity and parametric triggers are mooted as one way to effectively control the risks of aggregation and accumulation, in a new peril class that is gaining traction and profile both from buyers and sellers of risk transfer.

The growth opportunity within the cyber world is huge, and as such it will likely require a concerted effort from the insurance, reinsurance, ILS, and public sector, along with advanced modelling and information, to sufficiently cover the risks.

As with many emerging risks there are clearly unknowns with regards to cyber cover and the potential losses to the re/insurance industry and global economies, something that is exacerbated by the increasing digitalisation and interconnectedness of the world.

But at times of continued market softening and reduced returns, re/insurers and ILS players are very eager to deploy capital into cyber lines, and a continuation of the supply of capital is going to be vital as the market expands and the risks become better understood.

Collaboration between technology experts and re/insurers will likely be essential in aggregating and modelling the risk but, as this advances, the need for greater reinsurance and ILS participation will surely increase, further highlighting the value capital markets and reinsurance brings to protecting the world’s risks, old and new.

Also read:

Physical damage element of cyber re/insurance needs clarity.

ILS could insure cyber terror but greater risk clarity needed: BNY Mellon.

ILS & London can help cyber risk insurance flourish – BNY Mellon.

ILS & capital markets needed on “too big to insure” cyber risk: Study.

“Aggressive” cyber coverage growth credit-negative for re/insurers: Fitch.

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