Stone Ridge Asset Management, the New York based asset manager an alternative risk premia focus, including reinsurance and insurance-linked securities (ILS), has provided US $100 million in capital to support an innovative retrocession cyber quota share arrangement for global reinsurance firm Hannover Re.
Hannover Re claims this is the first transfer of cyber risks to the capital markets through a proportional reinsurance arrangement, calling it “another innovative step in Hannover Re’s risk protection strategy.”
The arrangement enables capital markets investors to participate directly in covering Hannover Re’s cyber risks through a quota share cession, with Stone Ridge a long-term partner of the reinsurer and the sole investor in this case.
This quota share covers cyber risks in Hannover Re’s worldwide portfolio and has a long-term orientation, while the reinsurer noted the important step of being able to reconcile the complexity of a proportional cyber risk cession with the needs of a capital markets investor as having been achieved in this case.
“For the first time, we were able to transfer cyber risks to the capital markets, and on a substantial scale, through a proportional reinsurance solution. This underscores our lead role as a bridge builder between the capital markets and the insurance industry,” explained Silke Sehm, whose scope of responsibility as a member of Hannover Re’s Executive Board includes retrocession and insurance-linked securities (ILS).
“We want to build on this initial success and further expand our cooperation with capital markets investors, extending also beyond our own retrocessions.”
“Stone Ridge investors value our approach to sharing the proportional business of select, leading reinsurers, as we now add cyber risk to our more than USD 60 billion notional limit deployed since our inception in 2012,” added Ross Stevens, Chief Executive Officer of Stone Ridge. “Cyber reinsurance represents a natural addition, and diversifying complement, to our other alternative investment franchises, as investors increasingly turn to Stone Ridge for investment outcomes superior to stocks and bonds. The market for cyber risk transfer is attractive given our expectation of high average returns and low correlation.
“With this transaction, we are thrilled to expand our treasured partnership with Hannover Re, extending our trading relationship beyond catastrophe and life risks, and we are just getting started. We intend to meaningfully grow our cyber exposure throughout 2023 and beyond.”
“We are proud to have achieved this milestone together with Stone Ridge and see further considerable potential for the transfer of cyber risks to the capital markets using the entire ILS toolkit,” Henning Ludolphs, Managing Director for Retrocession and Capital Markets at Hannover Re further explained.
“Given the strong demand, our clients rightly expect us to make adequate cyber capacity available to them.”
Hannover Re continues to leverage capital market investor appetite for its retrocessional reinsurance arrangements.
This deal is likely to be a privately entered into collateralized quota share arrangement, using a segregated cell vehicle of some description, which is similar to many of the arrangements Stone Ridge enters into on the property catastrophe side of reinsurance.
The company has also established a capital markets swap based life and health focused extreme mortality cover, that has paid out due to the pandemic.
Hannover Re leverages the entire ILS product range to transfer risks for its clients and cover its own risks with retrocession via the capital markets.
The company was responsible for or facilitated roughly EUR 8 billion of risk transfer to the capital markets in 2022, and ranks among the largest providers in the ILS market.
This cyber quota share comes on the heels of Beazley’s recent cyber cat bond issuance, further demonstrating that cyber risk is anticipated to become a growing component of the insurance-linked securities (ILS) market.