ILS market’s cautious approach to cyber can create sustainable ecosystem: SIFMA

The insurance-linked securities (ILS) market has spent considerable time seeking to better understand the cyber opportunity and this proof work can help to create a sustainable ecosystem around investing in cyber insurance risks, speakers said yesterday at the SIFMA ILS event in Miami.

Cyber has been the talk of ILS conferences for some years now and while small securitized transactions had previously been entered into, the pace of activity is now increasing.

This is thanks to the hard work that has been put into understanding the risk by the market, speakers said.

Richard Pennay, CEO of Insurance-Linked Securities at Aon Securities explained yesterday that interest in cyber ILS is now burgeoning.

“I think from our side, we’re seeing a huge amount of interest in the space,” Pennay said, as he moderated a fireside chat to open the SIFMA ILS conference, with Christopher Hetner, Cyber Risk Advisor to the National Association of Corporate Directors and a former Cybersecurity Advisor to the SEC Chair.

Pennay continued to say, “It’s the transparency of exposure, and the quantification of what that exposure really is that is paramount.

“But there’s also a very significant amount of work being done, with respect to the wordings and the event definitions, and these types of things, because ultimately, all of this has to come together for this market to thrive.”

Hetner said there is a need to focus on the modelling and understanding of cyber risk, because, “If we equip the risk transfer markets with the right level of analytics, the right level of rigour in terms of formation of these policies up-stream, that will ultimately set the standards.”

Hetner also explained that the potential exposure opportunity in cyber could be huge and as a result securitization of the risk, and its transfer to the capital markets could be significant.

“Once the ILS markets adopt these products, it opens up capacity,” Hetner explained. “The carriers will be able to offer additional coverage. But I would also encourage you to think about forming products that can drive these requirements and standards downstream, to make sure that, bottom-up, the formation of policies is aligned to the inherent business risk.”

He added, “If the requirements are solidified and understood, that just creates more certainty in the formation of these financial products, which then creates a benefit for the investment community.”

Pennay further stated that, “I think, just generally speaking, tthat he ILS market is ready to really explore cyber.

“It has to-date been doing proof work, it’s a mere fraction of the overall insurance-linked securities market.

“But, it’s a testament to the ILS market in moving cautiously with respect to cyber, and this is ultimately what’s going create a sustainable ecosystem.”