Cyber Insurance-Linked Securities (ILS) are financial instruments that allow insurers to transfer cyber risks, such as those related to ransomware attacks or data breaches, to the capital markets. These securities operate similarly to catastrophe bonds in traditional ILS markets, where investors provide capital in exchange for the opportunity to earn returns based on the performance of specific risks.
In the context of cyber insurance, ILS vehicles allow insurers and reinsurers to offload large-scale or systemic cyber risks, such as widespread cyberattacks, to investors. By doing so, the insurer mitigates its exposure to catastrophic cyber events, while investors are compensated through premiums for assuming that risk. If a defined cyber event occurs, investors may lose part or all of their invested capital, depending on the structure of the ILS contract.
This market is relatively new but is gaining traction as demand for cyber insurance rises. In 2023, Bermuda-based ILS vehicles issued $670 million in cyber-specific ILS, reflecting growing interest from both insurers and investors in using capital markets to manage cyber risk. The cyber ILS market is expected to expand further as insurers look to complement traditional capacity with innovative risk transfer solutions
Cyber ILS also helps address the massive global cyber insurance protection gap, which is currently estimated by some sources to be around $900 billion. This gap underscores the need for additional risk capital, making ILS an attractive solution for managing cyber risks in an increasingly digital world.
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