Property-cyber blended solution for costly tail risk needs ILS participation: Gallagher Re

A new Gallagher Re white paper argues that blending cyber tail risk with uncorrelated property catastrophe risk in shared-limit reinsurance structures can lower pricing and improve efficiency for cedants, though the firm notes that long-term success will also require participation from the insurance-linked securities (ILS) market.

According to the global reinsurance broker’s new white paper, “Cyber and Property Combined Covers: Buying the Tail More Efficiently,” the cyber insurance market has doubled in size globally, with gross written premiums climbing from $8 billion in 2020 to $16 billion today.

As the cyber insurance market continues to grow rapidly, insurers are increasingly seeking effective ways to protect against extreme cyber tail events.

“We have long identified cyber risk as a potential driver of volatility for (re)insurers, and hence of their capital levels. In other words, if there were a large-scale cyber catastrophe, it could impact (re)insurance balance sheets in a similar way to an unexpectedly severe natural disaster — albeit the quantum of losses would likely be much smaller,” Gallagher Re explained.

The broker outlined that insurers remain well aware of these risks, with the broker expecting demand for cyber excess of loss (XL) tail protection to grow materially in the coming years.

“As an illustration, at the 1.1.26 renewal we saw — for the first time — the purchase of a $1bn Cyber XL tower,” Gallagher Re said.

The white paper also posed a key inquiry for the market regarding whether cyber tail protection should be purchased as a standalone solution or incorporated with other tail covers within combined reinsurance structures.

But most relevant to Artemis however, is where Gallagher Re highlighted the growing role of insurance-linked securities (ILS) and cyber catastrophe bond markets in diversifying the capital base and supporting rising demand for cyber tail protection.

“The market for Insurance-Linked Securities is referred to as the “cat bond” market for a reason: it is continuing to absorb a huge amount of catastrophe tail risk from the property market. Assets under management in the ILS market reached USD128bn in December 2025,” the broker said.

Referring to a paper that the firm published in 2022, which examined the medium-term future of the cyber insurance industry, Gallagher Re said that it theorised at the time that the ILS market would eventually become relatively more important to cyber reinsurance than it is to property.

“Our thinking was that cyber re is both fast-growing by total premium volume and systematically less diversified than property so traditional reinsurers will only be able to absorb so much net exposure, and the bond markets will take comparatively more of the strain.”

According to the broker the industry is beginning to see this play out.

“The amount of cyber capacity available in the ILS market has grown exponentially in recent years. When Beazley raised USD300 million for its PoleStar Re Ltd. (Series 2026-1) cyber cat bond in December, it marked the largest single cyber issuance in the market so far,” the broker said.

Adding: “We are also seeing pricing for cyber cat bonds fall significantly, with the so-called “innovation premium” associated with the first trades now a distant memory. We anticipate this will drive greater demand from sponsors in the future.”

You can read about every cyber cat bond transaction, including the first private cat bond deals and the more recent 144A cyber cat bonds, by filtering Artemis’ Deal Directory by peril to view only cyber cat bond transactions.

Nevertheless, while there are significant discounts to be achieved in traditional reinsurance coverage by purchasing property and cyber together, Gallagher Re stresses that doing so through the ILS market can provide greater savings and expand the limit available.

Ian Newman, Global Head of Cyber at Gallagher Re, commented: “As the cyber insurance market continues to grow, insurers are facing increasing challenges in managing their exposure to extreme tail risks.

“By leveraging diversification benefits and exploring opportunities in the ILS market, we can help our clients navigate this evolving landscape and build resilience for the future.”

“The future of efficient cyber tail protection lies in a combination of multi-peril reinsurance solutions and growing use of the insurance linked securities and cyber catastrophe bond markets to diversify the capital base,” Gallagher Re further added.