Cyber ILS poised for ‘tremendous evolution’ in 2024: DeNexus

Despite some obvious limitations which can be overcome, 2023 will be remembered as the year when cyber insurance-linked securities (ILS) became a reality, with further developments expected in the year ahead, according to Jose Seara and George Mawdsley of DeNexus.

2023 was a ground-breaking year for the cyber re/insurance space, as after years of debate and work, cyber risk arrived in the capital markets.

Beazley was the first to test the waters with three privately placed cyber ILS deals in 2023. Then, in the fourth quarter, Beazley, AXIS Capital, Swiss Re, and Chubb all sponsored full 144A cyber cat bonds. All in all, $496.5 million of cyber reinsurance was secured from the capital markets via the cat bond lite and 144A cyber ILS deals.

Against this backdrop, we spoke with Jose Seara, the Founder and CEO of DeNexus, the specialist provider of cyber risk quantification tools and software, and George Mawdsley, Head of Risk Solutions at the company, about the recent transactions and what the future might hold.

“I think it’s a really good step in the right direction,” said Mawdsley on the almost $500 million of cyber ILS deals seen in 2023. “It’s great that people are getting more involved, and what I’ve really enjoyed about the cyber industry is they are open to new ideas and innovation, potentially more so than some of the other lines of business I’ve worked in.”

While these cyber ILS transactions are a positive step, given the issues around what the aggregation risk is, and what a cat event looks like, Mawdsley stressed that they aren’t a sustainable solution.

“I think investors are still looking at cyber as a homogenous risk – if it goes it all goes and therefore, they’ll only put up what they’re willing to lose 100%. They’re not looking at it in a nuanced way, and they’re not approaching it from a PML perspective and saying well, I can only ever lose 10% of my capital because I can see how an aggregation works, and how the loss filters through the system.

“And until we solve that, I think investors are always going to be limited and cautious about the asset class. It’s a challenge, but it will be solved, and I think these bonds are a great step in the right direction. They’re getting people interested, and it’s only by getting investors interested that we’ll solve this issue,” said Mawdsley.

In spite of the limitations outlined by Mawdsley, DeNexus’ CEO Seara believes that 2023 will be remembered as the year when “cyber ILS became a reality.”

“I personally think that we will see tremendous evolution in 2024. You know how this market works, we grow, grow, grow, something happens, we learn a bunch of lessons and we go back to the drawing board and apply those lessons and keep growing,” said Seara.

“But, in my opinion, this is here to stay. The risk is here and arguably is growing. Our digital footprint is exponentially growing every single day. The world, society needs to do something with the risk, and we need to treat it responsibly. We cannot leave these companies that own the risk totally exposed and naked because we rely on them for our daily lives.

“So, we need to keep working on providing proper risk management solutions, and at the same time, making sure that people putting risk capital to work behind this risk, also get the returns that they expect to get,” said Seara.

As the cyber insurance-linked securities (ILS) market sees increasing activity levels, we now have seven public and private cyber catastrophe bonds listed in our Artemis Deal Directory.

Read all of our interviews with ILS market and reinsurance sector professionals here.