Cyber has potential to become the cat bond market’s third ‘peak peril’: Man Group

Cyber risk could eventually stand alongside U.S. wind and U.S. earthquake as the catastrophe bond market’s third peak peril, according to a recent commentary from global independent alternative and active investment management firm, Man Group.

The investment firm sees cyber’s unique profile and growing coverage demand as setting the stage for its evolution from a niche threat into a core component of insurance-linked securities (ILS) portfolios.

In its commentary, Man Group highlights the market-shaping potential of cyber events, arguing that they offer cat bond investors both attractive yields and genuine diversification.

With over 70% of cat bond exposure currently tied to US wind and more than 45% to US quake, the firm makes a strong case that investors should look beyond traditional natural catastrophe risks to better manage tail concentration and optimize capital efficiency.

“We examine cyber as a man-made peril. As well as being orthogonal to other perils, there is demand for cyber cover that cannot be fully met by traditional reinsurance. As a result, we see opportunity for this peril to experience steady growth in the cat bond market and perhaps become a diversifying ‘third peak peril’,” Man Group said.

Importantly, Man Group notes how cyber premiums have risen dramatically throughout the last several years, climbing from $3.9 billion in 2017 to an estimated $15.3 billion in 2024, and are forecast to more than double by 2030.

“As carriers acquire increasing amounts of this risk, it becomes a peak peril primed to tap the cat bond market,” Man Group said.

Since their introduction to the cat bond market in 2023, cyber catastrophe bonds have gained traction as an alternative risk transfer mechanism, enabling insurers and reinsurers to expand their capacity by shifting portions of cyber risk to the capital markets.

As a reminder, you can read about every cyber cat bond transaction, including the first private cat bond deals and the more recent 144A cyber cat bonds, by filtering our Deal Directory by peril to view only cyber cat bond transactions.

A key factor in cyber’s emergence as a securitisable peril has been the development of risk modelling platforms and industry indices. PCS, RMS, and CyberCube all offer key modelling frameworks, ranging from bottom-up loss accumulation to stochastic scenario-based approaches, while PERILS administers an index that enables market-based, industry-loss triggers.

The diversity of deal structures is also growing. While most public cyber cat bonds are indemnity-based, Swiss Re’s Matterhorn Re Ltd. (Series 2023-1) issuance uses an industry loss trigger with attachment at $9 billion and exhaustion at $11.5 billion.

“What will drive further growth of the cat bond market, currently at US$54 billion? On the investor side, strong recent performance, diversification, and increasing mainstream press coverage is supporting interest,” Man Group added.

The firm continued: “Where will additional supply come from? We see a steady stream of new sponsors in the space, and inflation also drives increased demand for cover. New perils are the other source of capacity. Some new perils (e.g. New Zealand quake) are naturally constrained in demand, but the demand for cyber cover has been growing, is substantial, and has room for further growth.”

Still, Man Group highlights that the path forward will not be without obstacles.

Cyber is a fast-evolving threat with limited historical data, and confidence in modellers will take time to build

“While not all funds include this peril, those that do see higher spreads to compensate for these uncertainties,” Man Group noted.

Concluding: “Yet rewards have been attractive for those who were early adopters, and we believe cyber has the potential to become the third peak peril over time.”

Read about every cyber catastrophe bond by filtering our Deal Directory by peril to view only cyber cat bond transactions.