Cloud outage risk primed for parametric cyber ILS risk transfer: Parametrix

Managing general agent and Lloyd’s coverholder Parametrix, a specialist in cloud downtime insurance protection structured on a parametric basis, believes that catastrophic cloud outage events will become a new cyber insurance-linked securities (ILS) offering.

“The cloud” is handily defined as “servers that are accessed over the Internet, and the software and databases that run on those servers” by specialist infrastructure provider Cloudflare, a service provider to Artemis.

Parametrix has developed a parametric “cloud in a box” structuring solution, through which it aims to help protect ceding re/insurers against a major or sustained cloud outage.

Cloud outage is a significant exposure for many re/insurers through their cyber portfolios, so hedging solutions that target that specific risk class could be very attractive.

Parametrix has already been working with major reinsurers, one being Hannover Re, we are told.

The “Cloud-in-a-Box” structure will utilise a concrete, predetermined, and easily observed parametric trigger to transfer the outage risk of specific cloud service or groups of services (such as storage) provided by a specific vendor (such as Amazon Web Services) in a pre-defined cloud service region to reinsurance or capital markets.

“Significant accumulation of cloud outage risk is already on the books of many insurers and reinsurers. cyber insurance would become a much more attractive class of business if this potentially catastrophic accumulation risk were better managed,” explained Yonatan Hatzor, co-founder and CEO of Parametrix. “We can do that through ILS structures.”

Dr. Rom Aviv of RHA Advisory, a senior advisor to Parametrix, added, “The structure will follow either the cloud downtime exposures within cedants’ underlying portfolios, or will refer to a peak-risk region which could lead to a significant loss. Correlation between cloud outages and the broader economy is low, so cloud downtime risk is potentially diversifying for investors. It features a well-defined trigger mechanism, short-tail, and a very limited risk of trapped capital or loss inflation.”

“All indications show that this risk is not going to disappear. On the contrary. As such, we see the development of these ILS instruments as a vital element to support this growth,” Hatzor concluded.

To put some figures behind the cloud outage risk, the global cloud computing market, defined by the amount spent on public cloud-based services, is estimated to have reached $545.8 billion in 2022.

Growth of the public cloud computing market is projected to reach $124 trillion by 2027, while another study suggests that 90% of organisations use cloud infrastructure of one kind or another.

What’s interesting about these cloud outage parametric triggers, is their distinct and diversifying nature, even against many other areas of cyber exposure.

It’s the first sign that cyber risk, as an insurance-linked security (ILS), could break apart into distinct product sets, some of which will offer ILS investors that want to allocate to cyber risks a way to diversify within the overall class of insurance and reinsurance business.

For major reinsurance companies, such as Hannover Re that is said to be working with Parametrix, being able to efficiently transfer the risk from distinct cyber exposures to the capital markets, as part of their retrocession or as a hedge, could prove to be very attractive.

As with all cyber ILS, we’d imagine a parametric cyber ILS will come to market first as a privately placed cat bond-like deal, before once success is proven growing into a larger and perhaps 144a cat bond issuance.