Swiss Re Insurance-Linked Fund Management

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Most ILS funds interested in cyber risk as deal experience grows: PCS


The majority of insurance-linked securities (ILS) fund managers are interested in cyber re/insurance risk and are free from mandates prohibiting engagement, suggesting the ILS space is “quite ready to consume more cyber insurance risk,” according to Tom Johansmeyer, Head of PCS.

cyber-securitisation-ilsA recent survey conducted by PCS, a Verisk business, sought to gauge ILS fund manager sentiment for cyber insurance and reinsurance risk and explore misconceptions about ILS appetite, amid a lack of capacity in the cyber marketplace.

The first of its kind study includes representatives from 24 ILS funds, representing 78% of the ILS market by assets under management (AuM).

“A persistent and common misconception in the traditional re/insurance market is that ILS fund mandates prohibit them from participating in cyber, along with many other man-made classes of business,” explains Johansmeyer.

The survey results show that this isn’t the case, with 95% of respondents by AuM revealing that they are not prohibited from engaging in cyber re/insurance deals by mandate, although 28%, or five of the funds that participated in the study, do have partial prohibitions.

In fact, just two of the respondents have mandates prohibiting assuming cyber risk. Of these, Johansmeyer explains that one has no interest or appetite in the risk, while the other has been more willing to explore the market.

At the same time, “Several funds explained that they have no appetite for cyber re/insurance risk, even though trading in that class of business is not specifically prohibited by their mandates,” says Johansmeyer.

So, while the majority of funds are free to enter the cyber re/insurance space, for some, there remains a lack of appetite, although the study reveals that this is a minority.

By AuM, 71% of respondents are interested in cyber re/insurance risk. Of these 13 respondents, several indicated that they might enter the space when they feel the time is right, or when enough of their peers have.

“Of the respondents interested in consuming cyber re/insurance risk, some reported they have already done so, and are either committed to the class of business or are showing further appetite for cyber risk, which has gone unmet due to lack of deal flow,” explains Johansmeyer.

While eight respondents to the PCS survey suggested they were not interested in cyber risk, it’s not because they haven’t analysed the marketplace. Overall, 18 funds, which account for 85% of AuM, said that they have reviewed the cyber market.

On this finding, Johansmeyer notes that, “The ILS sector knows there is enormous demand for cyber insurance, which translates to further demand for reinsurance and retrocession, suggesting that eventually, the market will have to engage. In fact, several respondents offered a sense of fatalism in this regard, understanding that, eventually, they would have to assume cyber risk simply to be a part of the market.”

When it comes to actual ILS engagement with the cyber insurance and reinsurance sector, Johansmeyer explains that it has been fairly frequent, although the deals have been small.

In fact, by AuM, just 25% of the ILS space have traded cyber risk, which is some way behind other specialty lines of business. However, “the fact that more than a quarter of the sector has experience with cyber suggests a foundation for further market growth over the coming years,” says Johansmeyer.

The final question put to the ILS funds asked whether or not they have been shown cyber reinsurance deals by brokers. The data shows that 12 respondents, including most of the top 10 by AuM, were shown deals by reinsurance brokers.

“Many respondents who were not shown cyber re/insurance deals figure that reinsurance brokers knew that, for them, there were no circumstances under which such transactions would be considered,” explains Johansmeyer.

“The shortage of capital from which many in the cyber insurance market currently suffer could be resolved through the engagement of new sources, particularly the ILS sector. The belief that the ILS market had little interest in cyber risk resulted directly from a lack of discussion with the ILS community. Quite simply, nobody asked about their appetite for cyber risk.

“This study shows that, contrary to prevailing opinion, the ILS market is quite ready to consume more cyber insurance risk, which could help the sector grow and play a more important role in societal stability and economic security,” he concludes.

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