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Cyber ILS deals an opportunity to “lessen tail risk” for expanding product line: Fitch


The issuance of Beazley’s $45 million Cairney cyber catastrophe bond, and Hannover Re’s $100 million, Stone Ridge Asset Management-backed retrocession cyber quota share arrangement, “represent the potential for a broader reinsurance source for the risk,” according to Fitch Ratings.

cyber-securitisation-ilsAnnounced just days apart, these two deals, while offering different structural profiles and limited distribution, are encouraging for insurers and reinsurers in the cyber risk world, says the global ratings agency.

Since then, Beazley also returned with a second cyber cat bond issuance.

Currently, the cyber insurance market accounts for less than 1% of the close to $800 million of total U.S. direct premium written (DPW), but is growing faster than any other product line with DPW expanding by 73% in 2021 to around $4.8 billion.

As noted by Fitch, European reinsurer Munich Re has said previously that the global cyber market could reach a size of $25 billion by 2025.

With many expecting cyber to become an increasingly large and important line of business for insurers and reinsurers, coupled with the fact it’s a systemic exposure, it’s often been said that the deep pockets of the capital markets will be required in order to support market growth in a sustainable manner.

Fitch feels that these two deals, which transfer cyber risk to the capital markets through the issuance of insurance-linked securities (ILS), shows the potential for a broader reinsurance source for cyber risk.

“Capital markets solutions for cyber (re)insurers present the potential for counterparty diversification and an opportunity to lessen “tail risk” for a rapidly growing product line of property/casualty insurance.

“Wider development of the cyber risk transfer market requires further maturation of the product, including greater standardization of coverage terms and policy language, price discovery and risk modelling applications,” says Fitch.

The man-made nature of cyber risk makes it very difficult to assess, and challenges around modelling, as well as a limited data set of historical claims where past events are not necessarily indicative of future risks, has hindered growth somewhat.

However, it’s hoped that these two deals will be a catalyst for greater transfer of cyber re/insurance to the capital markets, and Fitch expects early deals to be of a modest size, and comprised of cyber risks that are easier to model and quantify.

“Although cyber risk has been transferred to capital markets on a private basis through collateralized reinsurance deals, these public transactions may represent a stepping stone to broader market acceptance that provides insurance companies additional capital, lessens counterparty risk, and a future vehicle for cyber catastrophe coverage,” says Fitch.

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