In the course of the Geneva Association’s media call on Global Risks & Insurance, Darren Pain, Director of Cyber, highlighted his expectation for continued growth within the cyber insurance-linked securities (ILS) market, though he noted this growth is prone to be gradual on account of ongoing challenges.
The cyber ILS market has developed rapidly, with 2023 marking a pivotal yr for the cyber re/insurance space. After years of debate and energy, cyber risk finally made its debut within the capital markets.
“A nascent marketplace for cyber ILS is emerging. In 2023, five catastrophe bonds were issued, but for those who take into consideration other sorts of ILS, other instruments have also been developed,” said Pain.
Beazley was the primary to act, with three privately placed cyber ILS deals in 2023. Then, within the fourth quarter, Beazley, AXIS Capital, Swiss Re, and Chubb all sponsored full 144A cyber cat bonds.
This momentum continued into 2024, which has seen three cat bonds issued to this point. Of those, two are the most important on record: Beazley’s PoleStar Re Ltd. (Series 2024-2), issued in May 2024, and PoleStar Re Ltd. (Series 2024-3), issued in September 2024, providing $160 million and $210 million of reinsurance, respectively.
Adding to this, Hannover Re unveiled Cumulus Re (Series 2024-1) in April 2024, the world’s first cloud outage catastrophe bond, providing investors with a latest avenue into the cyber ILS space.
Despite these advancements, Pain cautioned, “I believe the punchline from our evaluation is that while the recent cyber cat bonds are a welcomed development and we anticipate continued growth in that market, there are still some headwinds that should be overcome to facilitate a deeper and broader transfer of cyber risk to capital markets.”
Pain identified that a key challenge with cyber ILS in comparison with other ILS instruments is the perception—on account of the dearth of a wealthy history of major cyber incidents—that cyber risks involve more systematic elements.
“For which I mean, if you will have a cyber incident, it would coincide with antagonistic developments in other financial markets. So, if a cyberattack hits an organization, it could potentially impact their earnings or solvency position,” he explained.
Pain continued, “In that case, it’s possible you’ll well have some impact on equity markets or corporate bonds. In consequence, it stays unclear how far adding cyber to a portfolio can be helpful to an investor when it comes to reducing overall risk. That’s different than the nat cat world, where natural catastrophe perils typically don’t coincide with major falls in financial markets, and the potential portfolio diversification advantages are rather more straightforward.”
He concluded, “So, that could be a challenge for the time being. We proceed to expect that ILS will develop further for cyber however it is prone to be gradual. And that might actually echo what we initially saw with other instruments for transferring risk to the capital markets, including the nat cat.”
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