Swiss Re Insurance-Linked Fund Management

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ILS investors need certainty on cyber, risk models are key: CyberCube


Insurance-linked securities (ILS) investors are looking for greater certainty on cyber risk before diving into underwriting cyber reinsurance contracts in ILS form. While this market is still developing, CyberCube is working directly with the industry to try to drive greater understanding and comfort of the risks involved.

cyber-securitisation-ilsCyber risk is often cited as a panacea for the ILS market, offering peak catastrophe peril-like exposures and returns, in a risk category that is growing fast, offers specific diversification away from natural disasters and many feel is destined to become one of the largest sources of premium in the global insurance market.

While the ILS market is dabbling in cyber risk right now, with a number of private transactions such as quota shares having been backed by the more adventurous among the ILS funds, there is a long way to go before we see large, syndicated cyber ILS transactions that look more like what ILS investors are used to, such as an indemnity cyber catastrophe bond.

Yes, there’s already opportunity to enter into large cyber risk transactions, if you’re brave and sophisticated enough to work directly with large, global technology firms, or happy to take quota shares from commercial insurers.

But most ILS fund managers lack the necessary data, tools and models to enable them to get fully comfortable with deploying more than just a tiny percentage of their assets into cyber risk.

Enter risk modelling technology.

We first mentioned the importance of risk models when it comes to cyber risk entering the ILS market back in 2014, going into more detail on this in early 2015 here.

Things have moved on, thankfully and there are more options available now for ILS fund managers looking to analyse cyber risk underwriting opportunities.

But still the lack of advanced risk models is seen as the major issue holding back the ILS market’s more wholesale entry into cyber reinsurance underwriting, according to cyber risk analytics specialist CyberCube.

We can all agree that the traditional reinsurance market alone would struggle to bear the costs of a massive cyber industry loss and that assistance from the capital markets is likely to be required.

Even the CEO’s major global insurers and reinsurers have admitted as much, we’ve heard as much from Munich Re’s board member for reinsurance Torsten Jeworrek, AIG CEO Brian Duperreault, as well as from experts at Swiss Re.

CyberCube agrees, saying that, “The financial impact of a future global software failure could be so great that the (re)insurance industry is likely to require additional capacity from the capital markets.”

CyberCube is actively talking to the insurance and reinsurance market, as well as ILS funds, to gain a better understanding of the blockers that currently stop more of this risk making its way to the capital markets.

The company said that its goal is to, “determine the technical hurdles that must be cleared before ILS can be used in the cyber market with any degree of certainty.”

Risk models will be a key piece of the development of a cyber ILS market, but so too will targeting the right layers of the market and the right types of risk, as well as structuring them with triggers that are understandable, measurable and transparent.

CyberCube said that cyber risk shares many similarities with peak peril catastrophe exposures, but currently lacks the modelling tools necessary to help investors gain the certainty they want to get comfortable enough to invest in the emerging class of business.

As well as models, the company also highlights indices and the use of insurance industry loss triggers for cyber, as one way to fast-track cyber ILS transactions.

This is certainly true, but any index needs to consider how it deals with silent cyber and other ways losses can leak across lines of business. Plus, even with an industry loss trigger the investors will need to be able to model the risk, gain an understanding of the exposure and analyse the subject business portfolios and how they correlate to broader industry factors.

CyberCube hopes its work can help to develop better tools for ILS investors and other insurance or reinsurance market users, to help them gain greater understanding of cyber exposures and to therefore get more comfortable with the risk.

Laurel Di Silvestro, Principal, Client Services at CyberCube, explained, “ILS investors sense an opportunity in the cyber risk market but are still treading carefully in what is a fast-evolving landscape.

“Unlocking the potential of ILS in the cyber market requires collaboration from right across the industry – brokers, carriers, investors and the risk modelling community. CyberCube is committed to playing its part.”

Cyber ILS also requires lateral thinking, to spot opportunities where traditional insurance is failing to deliver and to work directly with risk bearing cedants who have a far better understanding of their exposure than the insurance industry often does.

We’ve said before that parametric triggers for cyber risk, to wrap some level of understanding around major systems exposures for specific large clients could be an interesting way for cyber ILS risk transfer to develop. These have particular promise in areas such as cyber business interruption coverage.

ILS market participants interested in cyber as a class of business should engage with those holding the risk and help them to understand how their understanding of their exposure and data could be used to structure efficient risk capital solutions that could offer protection to revenues and business operations.

Cyber risk underwriting continues to develop apace and the collaboration between specialists such as CyberCube and the ILS industry will help to drive greater understanding and comfort in what still shows promise as a future category of business that ILS investors will want to allocate to.

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