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Investor education key to first cyber cat bond: Gallagher Re’s Newman & Norris


Educating insurance-linked securities (ILS) investors was one of the keys to bringing Beazley’s cyber catastrophe bond successfully to market, according to Ian Newman and Theo Norris of Gallagher Re.

ian-newman-theo-norris-gallagher-re-cyberSpeaking with Artemis after the deal was announced, Newman and Norris, described some of the process and work needed to get the first cyber cat bond to market, the culmination of an effort that has been underway for some years now.

The pair were both instrumental in the work reinsurance broker Gallagher Re and its ILS-focused unit Gallagher Securities undertook to support the issuance of this first cyber cat bond.

As we explained earlier today, Beazley has successfully secured $45 million of reinsurance through a Section 4(2) private but relatively broadly marketed cat bond issuance.

Gallagher Re has been working towards achieving broad transfer of cyber insurance risks to the capital markets and ILS investors for a number of years, seeing the need to expand market access beyond just traditional reinsurance capital.

Ian Newman, Global Head of Cyber at Gallagher Re, explained, “We believe Cyber is going to be one of, if not the most, capital constrained classes of business in the future. Initiatives like the market’s first Cyber Cat Bond bring potentially billions to the space to narrow the supply gap.”

But to get there, it’s been a long process that began in the traditional reinsurance market and involved work across the modelling, analytics and actuarial side of Gallagher Re’s service offering, through the wording arm of the reinsurance broker, and finally the capital market structuring and placement services of Gallagher Securities.

Newman said that education of the ILS investor community has been key and something Gallagher Re has been engaged in right through the process.

“Our goal at Gallagher Re, for a long time, has been how do we bring more capacity to the marketplace? One of the great challenges to the cyber market is how we find capital,” he explained. “We’ve done this in a range of ways over the years to get markets in the rated community more comfortable with cyber. Then in 2017, we brought in ILS capacity through the first collateralised re trade to contain cyber risks.

“Now, it’s very much a continuation of this process. We knew we needed to move towards capital markets for capacity, so made a decision to step up our level of investment into resource. We hired Theo Norris in late-2021 as our dedicated Cyber ILS resource, and he led our efforts on the Beazley deal.”

Newman went on to explain that Gallagher Re has invested heavily in its cyber capabilities with a view to enabling capital market and ILS risk transfer in catastrophe bond form.

He said that this investment saw the cyber analytics team scale up to 16 cybersecurity experts, cat modellers and actuaries.

“Over several years we have used them to educate the ILS community around cyber, to get them comfortable with our view of risk and the systemic peril itself,” Newman said.

Adding, “That’s been a long process to make sure that all the funds involved, when they first saw this trade, we’d already got them a long way over the line in terms of what the view of risk needed to look like and that that made sense for them.”

Theo Norris, Cyber Account Executive – Insurance-Linked Securities, who joined Gallagher Re as a dedicated cyber insurance-linked securities (ILS) broking resource in 2021, discussed the importance of investor education with this first cyber cat bond.

“This has been a multi-year journey with Beazley and ILS markets more broadly,” Norris explained. “We’ve spoken with many ILS investors around cyber in the past several years, to educate them on the peril and assess readiness for deployment. We have reaped the rewards of the time spent through this transaction, and have set a framework to build upon for Beazley and the market more broadly.”

Norris continued, saying, “We’ve been educating ILS investors, providing workshops with our actuarial and consultancy teams, and exploring occurrence wordings with them. That’s been a slow burn to get them comfortable, but will likely benefit the future of the Cyber ILS market.

“We’ve also co-ordinated continual discussions between Beazley and ILS investors, so that they could get to see first-hand the excellence of Beazley’s Cyber operations. Because with the event definition being a bit broader in cyber than it is in property, it’s obviously absolutely essential that these core investors understand who they’re backing, how they operate and how their cyber ecosystem works.

“We’re reaping the rewards and benefiting from having addressed this so early and it’s been that continual journey.”

Newman went on to explain the importance of getting the wordings right, to ensure coverage for the client and an understanding and acceptance by investors.

“On the wording side, it was a very similar approach, where we’ve hired extensively within our consulting team and have developed a number of reinsurance wordings for the occurrence product.

“This was done on a traditional reinsurance market and, once in place, applied to the ILS investor community as a complementary Cat Bond,” Newman said.

He continued, “If we look at what we’re doing today, there are a lot of projects we are looking at for the future around the same theme of bringing additional capital to our clients.

“It’s about trying to make sure that everyone involved in the trade is comfortable.

“We’ve put a lot of work into making sure we understand that side of things, the occurrence language and what it means when a loss actually happens.

“All these things are iterations and they’re an evolution, and I guess the evolution isn’t so different from what we’ve seen in the property cat space. I think the only difference is these are all happening a lot quicker in cyber, just because the speed of growth is obviously faster.”

While this was a Section 4(2) private cat bond placement, it was actually broadly socialised and relatively broadly marketed, it seems.

Norris explained, “The marketing efforts were broad; there were over 10 markets reviewing this exact deal. This is very much a subscription deal, rather than a direct trade.

“A range of those not able to participate have suggested they may be ready to deploy within 2023, either as a tranche B or otherwise.

“There’s been more work by ILS investors in analysing cyber behind the scenes than some realise. I have seen that first-hand in my conversations; many are better versed in cyber than some may expect, believing standalone cyber has been a matter of “when”, rather than “if”.”

Newman said that the cyber ILS market is developing in a similar way to how traditional reinsurance players began writing cyber risk.

“When we look at the rated community in the reinsurance space, there were very few people who were writing cyber reinsurance 10 years ago,” Newman said.

Adding that, “We now see a huge number and the vast majority of people have gone from not doing it, to putting their toe in, to stepping up materially in the space.”

Newman went on to say that, when it comes to cyber risk, the insurance-linked securities (ILS) market is likely to see “more and more of the existing ILS funds look for opportunities in the space.”

While it’s unlikely to be something all ILS funds invest in, Newman said he also sees the potential for a “new breed” of cyber ILS specialist fund managers to emerge in time.

Finally, Norris highlighted some of the important work that was undertaken to make this first cyber cat bond appealing to as broad a range of ILS investors as possible.

“It’s a Section 4(2) but it trades like an underwritten Rule 144A new issue. The working group put in long hours to make this possible, and it was worth it for the increased liquidity,” he told Artemis.

Adding that, “We made this as liquid and tradable as possible; that was very important, because the platform had to be replicable not only on a wording point of view, but to tick the right boxes for ILS investors.

“Of course, we may be moving towards a full 144A, but the first needed to be private with the 144A tradable features, before we transition into that.

“We’ve gone in with a one-year trade with a three year extension. A lot of our work has been done to get people comfortable with the tail, extension mechanics and collateral release features.”

Gallagher Re has invested significantly to pursue the development of a cyber ILS market and to ensure a first cyber cat bond was feasible.

This work has now paid off and the company will be hoping to assist other potential sponsors make their first steps into the ILS market to source cyber risk capacity.

“This product is the culmination of years of preparation, and a stepping stone for Gallagher Re Cyber, Gallagher Securities and Gallagher Re to maximise capacity for our clients for years to come,” Norris said.

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