Hiscox has cyber ILS fund ambitions

Hiscox is targeting the launch of a new ILS fund focused on cyber risks, as it looks to put its expertise in underwriting cyber insurance and reinsurance together with its Hiscox Re Insurance Linked Strategies ILS management expertise to create what would be a new and unique insurance-linked investment opportunity.

Hiscox has always tried to innovate with its offerings to insurance-linked securities (ILS) investors, having expanded its ILS fund offerings outside of just reinsurance and retrocession to include a new primary focused strategy, the Kiskadee Latitude fund, earlier this year.

The company had also previously launched its Cardinal Re SPI, a vehicle designed to collateralize insurance risks across a broader range of exposures, including from Hiscox’s own terrorism and fine art portfolios, allowing investors to back them, benefiting from an even more diverse source of insurance-linked returns.

So, expansion of the Hiscox ILS strategies into cyber insurance and reinsurance underwriting returns is not a surprise, particularly given the re/insurers cyber expertise and the constant discussion of the potential for cyber as a new ILS class.

A number of cyber ILS transaction already exist in the market, although they are few in number, relatively small and largely bilateral in nature.

Hiscox Re & ILS launched a cyber industry loss warranty (ILW) product offering in early 2018, which is designed to provide aggregate reinsurance or retrocession limits based on the use of a PCS industry loss trigger for global cyber underwriting losses.

Product innovation like this has helped to further crystalise thinking around cyber risk in the ILS market, as a number of ILS fund managers tentatively explore the various offerings available to invest in.

The next step would be to bring cyber risk more meaningfully into appropriate investment fund strategies at Hiscox ILS, we’d imagine, with a potential dedicated cyber ILS fund a longer-term plan, the manager explained to us.

“We continue to increase our presence in the cyber market by broadening and refining our product suite,” a Hiscox spokesperson said. “This is demonstrated through the creation of the new ILW structure, our ability to identify and offer affirmative coverage for silent cyber exposure, and our on-going development of parametric cyber instruments as a means of expanding the market with lower correlating cyber risk.”

Parametric triggers are particularly suited to cyber exposure, as it can allow underwriters to ring-fence exposures down to a level where they can be better assessed and understood, without the potential for feared silent cyber exposure creep occurring.

Increasingly, as the understanding of cyber insurance and reinsurance related risks improves, models advance and data becomes increasingly abundant, the opportunity to launch a dedicated cyber ILS fund becomes more likely and possible to offer.

Hiscox’s spokesperson further explained the companies ambitions, saying, “Creating more capital efficient products provides an obvious opportunity for ILS investors. Although it is a new horizon for ILS, as modelling capabilities increase and the structural elements fall into place, cyber risk is beginning to align more closely with ILS investors’ risk appetite.

“We already have cyber in a fund format and think it’s an exciting use of ILS. We are in the early days in our cyber ILS journey and we look forward to making the most of this growing opportunity.”

Offering a dedicated cyber ILS fund would be a unique value proposition for Hiscox and there are not many firms that would be able to source the necessary underwriting opportunities to deliver on such a promise.

It’s not on the immediate horizon, but the fact the re/insurer is discussing the potential for a cyber ILS fund is encouraging, as it signals further work ongoing in the market to broaden the scope of ILS investments.