Demand for cyber insurance-linked securities (ILS) products should increase and there’s plenty of room for growth given their relatively low volume compared to similar securities linked to natural events, says Fitch Ratings, a major provider of credit ratings and analysis. “These (recent ILS) transactions of $145 million are a small fraction relative to the $10 billion of the 144(a) debt instruments cat bonds issued in 2022, which typically cover natural events such as named storms’ or earthquakes,” points out Fitch
We’ve reported on other bullish indicators for cyber ILS, cat bonds and reinsurance, including the growth of such vehicles in Bermuda. Last spring a bond information service reported the value of cyber cat bonds was holding up in trading (valuations may have changed since then.)
Impediments to Growth of the Cyber ILS Market
Fitch believes “(w)ider development of the cyber risk transfer market requires further maturation of the product, including greater standardization of coverage terms and policy language, price discovery and risk modelling applications. Cyber risk is difficult to assess due to the dynamic, man-made root causes of claims.”
This is consisent with other analysis of the market. Investors in cyber ILS are demanding higher risk premiums than those for legacy insurance cat bonds, we reported late last year: “They are demanding high-risk premiums because of the market’s complexity and the lack of predictive models. Liquidity issues, narrow investor bases, and inconsistent policy definitions hinder market growth.
‘The cost of transferring cyber risks remains a challenge,’ said Darren Pain, Director of Cyber and Evolving Liability at the Geneva Association. ‘Reducing these costs will be critical for unlocking the potential of ILS markets.’”
Examples of Cyber Insurance-Linked Securities
Fitch cites as examples of the cyber ILS market the “Cairney” cyber bond of $45 million from Beazley, which the ratings company describes as “providing excess-of-loss (XoL) coverage for cyber claims exceeding an attachment point of $300 million,” and the investment by Stone Ridge Asset Management in Hannover Re’s “$100 million collateralized reinsurance deal on a quota share (QS) arrangement.” See our reports on Cairney here and Hannover Re’s strategy on Cyber ILS/Cat Bonds here.
Other Cyber Insurance Data in the Report
The Fitch report also includes some interesting data on the broader cyber insurance market, such as a chart of the “Top 15 (Re)Insurance Cyber Underwriters” and cyber insurance direct loss & DCC (Defense and Cost Containment) ratios.
