Concerns over how a cyber catastrophe loss event could manifest mean many insurance-linked securities (ILS) investors remain cautious with regards to considering allocating to cyber catastrophe bonds and reinsurance, but interest continues to rise and broker Lockton Re expects more efficient capital will flow to cyber risks in time.
Commenting on cyber reinsurance capability and the expansion in event focused cyber risk transfer arrangements, broker Lockton Re is positive the continued education will drive increasing ILS fund and investor engagement on cyber.
The broker said that, “There have been several latest reinsurer entrants in H1 2024, with more capability from each traditional reinsurers and third-party capital sources. Newer non-proportional Event Excess of Loss coverages have picked up interest amongst cedants, leading to several event program transactions.
“Insurance Linked Securities (ILS) investors have notably increased their interest within the cyber market in the previous couple of months, with the well documented cyber cat bond issuances of over $580m of latest capital further growing supply.
“There isn’t a one reason which may be attributed to this peak in interest in H1, but reasonably was seen as the results of continuous education from brokers to support investors.”
This education process has been critical in developing the cyber catastrophe bond and ILS market and it continues, as increasing numbers of investors get comfortable.
Evidence for this is available in our understanding from sources that because the first cyber catastrophe bonds were issued, they’ve traded increasingly widely within the secondary market, with a growing ILS investor base now comfortable with cyber cat bonds as a part of their portfolios.
“With growing comfort of cyber risk as a profitable and sustainable class of insurance, more are committing the time to research it as a viable investment opportunity,” Lockton Re said.
Concerns remain though and should take time to evaporate sufficiently for cyber cat bonds to realize market-wide acceptance.
Lockton Re stated, “Many investors are still cautious, though the initial market making activity is driving engagement. As tail risk becomes higher understood by investors, the perceived concern of how a cyber catastrophe could manifest diminishes.
“This in turn allows more efficient use of capital in comparison with traditional structures, with the aim of protecting specific areas of concern inside portfolios.”
Continued development of cyber risk models is one other factor that helps to construct confidence available in the market, each on the normal reinsurance and ILS sides.
Lockton Re said that, “Confidence and understanding of the outputs of cyber aggregation modelling continues to evolve, especially for ILS investors. Model vendors have released updated model versions complete with probably the most recent data and cyber catastrophe modelling tools. There’s an understanding amongst all market participants that until more major cyber events occur, live claims data can be limited, and that is required for vendors to check and prove their assumptions, and ultimately recalibrate their models.”
All of which helps to unlock more capital for cyber risks, each traditional reinsurance and ILS sources, which bodes well for the capital being there’s more cedents look to the capital markets to sponsor cyber catastrophe bonds.
Examine every cyber cat bond transaction issued to date, including the primary private cat bond deals and the newer 144A cyber cat bond issuances, by filtering our Deal Directory by peril to view only cyber cat bond transactions.