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Cyber ILS gathering momentum, say Lockton Re, CyberCube & Envelop Risk


In a new report, global reinsurance broker Lockton Re makes the case for cyber insurance-linked securities (ILS), saying that “now is the time” as market conditions have reached the point where their potential can be fulfilled and cyber ILS is gathering momentum.

cyber-securitisation-ilsLockton Re has collaborated on the report with cyber risk modeller CyberCube and Bermuda headquartered cyber specialist underwriter Envelop Risk.

The broker says that the cyber insurance marketplace is maturing and growing dramatically.

At the same time the risk models available to analyse cyber insurance risks and portfolios are also maturing, as data and understanding of cyber risks are improving.

Oliver Brew, lead author of the report and London Cyber Practice Leader for Lockton Re, stated, “The mechanisms and methodology behind cyber modelling are becoming better understood, and the strength of the data and frameworks being utilised is increasing all the time, meaning the potential for cyber ILS investments can be leveraged to play a critical role in unlocking capacity required to continue developing the wider cyber insurance market.”

At the same time as the cyber insurance and reinsurance marketplace has been developing, the insurance-linked securities (ILS) market is showing increasing interest in cyber risks as a new component of ILS portfolios and the ILS asset class.

Brittany Baker, CyberCube Vice President of Solution Consulting and also a co-author of the report, said, “ILS investors are becoming more comfortable with cyber risk, but further education is needed on how cyber models work. Market-leading participants are increasingly demanding enhanced exposure management reporting that allows for more in-depth business intelligence reporting and more sophisticated strategic decision-making.”

David Ross, Executive Vice President of ILS & Capital at Envelop Risk believes that as the market matures, models improve and investor interest grows, now is the time for the cyber ILS market to accelerate its development.

Ross said, “There are compelling arguments that the time is right for investors to support cyber ILS.

“The class is in a secular hard market driven by increasing digitisation and growing insurance penetration. Those with access to data and a modelling advantage can build well-diversified and profitable portfolios to meet investor risk-return preferences. Structures exist to manage capital efficiently without dilution of returns from excessive collateral trapping.”

Brew, of Lockton Re, concluded, “This report supports the massive opportunities which arise from the continued demand for cyber (re)insurance which will only be further enhanced by the successful execution of cyber ILS transactions.”

The report states that the “massive opportunities” that arise from the continued growth of cyber insurance will only be enhanced as cyber ILS deals are completed.

The expectation is that cyber ILS will help to increase insurance and reinsurance capacity for this class of business, while progress will also see cyber risk isolated into a tradable format.

Concluding that, “As in any new category of investment, progress may be incremental, relatively small scale at first, and slow.

“The early trades may be harder to execute, but once those innovators seize the first mover advantage, there will be many following on. For now, in 2023, the ingredients are there for momentum to grow.”

We’ve seen very promising cyber ILS market developments already this year, such as Beazley’s cyber catastrophe bond (which CyberCube’s model was utilised in the structuring of), Stone Ridge Asset Management’s $100 million cyber quota share deal with Hannover Re, and Parametrix is working on its first parametric cloud outage cyber ILS deal.

Download a copy of the full report.

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