Cyber ILS primed for future growth if traditional capacity constraints emerge: S&P

While ample traditional reinsurance capacity is keeping the cyber ILS market limited for now, the underlying risk modeling and investor confidence in the asset class continues to grow. According to a new report from rating agency S&P, these evolving capabilities are laying the groundwork for alternative capital, which could play a much larger role should traditional reinsurance capacity constraints emerge in the future.

In a recent report, the rating agency notes that cyber capital market activity has subdued in 2026, with only one new cyber catastrophe bond issued so far this year.

Back in March, German reinsurer Hannover Re sponsored a second successful renewal of its landmark parametric cloud outage catastrophe bond, securing $35 million in retrocessional cyber reinsurance protection covering cloud outage events with a Cumulus Re (Series 2026-1) issuance.

The cat bond represents the third consecutive renewal of Hannover Re’s Cumulus Re program. Each issuance has increased in size, which highly reflects growing confidence in the structure and underlying risk.

“While established sponsors such as Beazley, Chubb, and Hannover Re renewed existing ILS in 2025 and 2026, no new cedents entered the market, and AXIS and Swiss Re did not renew their publicly placed cyber-ILS structures,” S&P said.

The agency continued: “The still limited cyber-ILS investor base is gradually broadening as investor confidence in the asset class grows. Cyber risk is still a relatively untapped insurance peril, which creates an opportunity for higher risk premium compared to more established natural catastrophe bonds. Improvements in cyber risk modelling are helping investors better assess risks and evaluate the associated risk/return profile. Nevertheless, uncertainty around tail risk means investors remain cautious.”

Likewise, S&P also flagged the risk of locked-up collateral. Because cyber loss claims can develop slowly after an incident is reported, investors face potential delays in redeploying their capital.

At the same time, the agency noted that cyber-ILS investors appear to primarily seek transactions that are related to extreme and remote risks structured as per-occurrence excess-of-loss coverage, instead of providing coverage for attritional losses from smaller cyber incidents.

Artemis’ data shows that cyber catastrophe bonds currently account for 1.3% of the outstanding catastrophe bond and ILS market.

Since the very first issuance in 2023, cyber catastrophe bonds have represented a steadily declining share of total catastrophe bond issuance volume, falling to just 0.19% of new issuance year-to-date in 2026, in part due to growing demand for nat cat ILS.

See details of every cyber catastrophe bond ever issued in the Artemis Deal Directory.

“While this decline may suggest a challenging market environment, the trend is primarily driven by limited need for (re)insurers to tap alternative capital rather than limited investor appetite. With ample capacity available in the traditional reinsurance market, relatively soft reinsurance pricing, and solid profitability across the cyber insurance sector, insurers and reinsurers currently have little economic incentive to tap capital markets through cyber catastrophe bonds,” S&P explained.

Adding: “Nevertheless, the bonds continue to play an important strategic role. Rather than competing with traditional reinsurance on day-to-day loss activity, they provide targeted protection against large-scale cyber events and serve as a mechanism for transferring tail risk into institutional capital pools. They can also be tailored to address specific exposures, such as cloud outage risk, as demonstrated by the Cumulus Re series from Hannover Re.”

However, S&P emphasises that the point at which re/insurers are likely to turn to alternative capital depends on two scenarios.

The first scenario features a gradual repricing of cyber risk in the primary insurance market, preserving the current structure. Under this track, traditional reinsurance capacity would remain broadly available and cyber-ILS would continue to serve as a strategic complement to traditional risk transfer mechanisms.

The second scenario is far more dynamic. If rising losses continue to outpace primary pricing adjustments, underwriting profitability in the primary cyber segment will face pressure, leading to more selective traditional reinsurance deployment.

“In this environment, cyber-ILS structures could prove increasingly attractive as a tool for managing cyber exposure, not because traditional capacity disappears, but because alternative capital may offer an additional source of scalable protection when conventional markets become constrained (so long as the risk/return profile remains attractive for ILS investors),” S&P commented.

S&P notes that scenario two suggests that the cyber insurance market may be approaching more than just an underwriting inflection point, and that the next phase of market development could change how cyber risk is financed.

While reinsurance remains the dominant absorber of cyber risk today, the agency says that a more challenging market environment could gradually increase the role of capital markets.

“While both trajectories remain possible, we consider scenario one to be more probable given that the decline in U.S. cyber insurance rates is beginning to decelerate. This slowing downward trend suggests that improved pricing discipline and more rigorous underwriting standards are recalibrating the market, likely preserving current structures and reinsurance availability. However, scenario two remains plausible should competitive pressures or excess capacity reemerge, resulting in pressure on underwriting profitability that could trigger more selective deployment of traditional reinsurance capacity,” S&P concludes.