As we move into 2023, the cyber insurance linked securities (ILS) market is expected to see real traction, as demand for capacity continues to outstrip supply, while data and models are improving, according to Brittany Baker, Vice President of Solution Consulting, CyberCube.
“Cyber risk as a new asset class for the insurance-linked securities (ILS) market has been a topic for discussion for several years,” Baker explained.
But she believes that, “The current state of the insurance market has set the stage for real traction in cyber ILS in 2023.”
Explaining the capacity problem, Baker said, “Demand for cyber insurance has generally outstripped the supply the insurance industry has the capacity or appetite to support. Enterprises of all sizes struggled in 2022 to find the coverage they require at affordable rates – or any cover at all. Cyber managing general agents (MGAs) have seen large funding rounds, but their growth has been limited due to this capacity crunch.
“Traditional primary carriers are also struggling to find reinsurance treaties that satisfy their capital needs to keep up with their growth projections.”
At the same time, the ILS market has been hit by a series of heavy natural catastrophe loss years, which has “increased the desire to present new asset classes to investors in a way that wasn’t necessarily required previously,” Baker explained.
As a result of which, “Cyber has started to make its way into the mandates of different funds and groups, which are building up a solid technical understanding of cyber risk.”
Baker noted that while there have been some private cyber ILS transactions, the market has yet to see a first cyber catastrophe bond issued.
“2023 is ripe for this to occur due to more sophisticated modeling, the development of industry exposure databases, and an increased understanding of cyber risk across the necessary stakeholders,” Baker believes.
However, when it does, this first cyber cat bond must lay the groundwork for further transactions, so simplicity will be key, Baker says.
“In order for the cyber risk ILS market to really take off, the first 144a cat bond will need to have certain characteristics. It must be simple and repeatable – if it’s too complex or niche, then the industry will still be left waiting. It will need to clearly define the covered perils and their event definitions – if other investors still see vague definitions or all perils, they will remain on the sideline,” Baker said.
Adding that, “Modeling and reporting agents have to prove they are up to the task – some may have experience in the nat cat world but others will be new to the game and will need to prove their value to the financial markets.”
Since Baker’s commentary at the start of the year, her forecast is already showing great promise.
We’ve seen very promising cyber ILS market developments, including Beazley’s cyber catastrophe bond (which CyberCube’s model was utilised in the structuring of), as well as Stone Ridge Asset Management’s $100 million cyber quota share deal with Hannover Re.
While we continue to hear of further promising developments, where ILS markets are looking increasingly closely at cyber risks.