Cyber catastrophe bond market – room for growth is considerable: Howden

There is “considerable” room for growth in the cyber catastrophe bond market, as cyber insurers and reinsurers get increasingly comfortable with event-based excess-of-loss coverage options and use of quota shares in the cyber reinsurance space reduces, broking group Howden has said.

Commenting on the growing cyber insurance market, Howden noted that prospects look strong, helped by “a growing and increasingly diverse capital base.”

“This will be crucial as the market moves beyond existing premium pools to meet the demands of businesses worldwide,” Howden noted.

Adding, “There have been a number of positive developments on the capital front over the last 12 months. Beyond plentiful supply on the direct side, conditions in the cyber reinsurance market have also improved, with pricing softening and capacity more than sufficient to meet demand.”

One notable change in the cyber insurance and reinsurance market is underwriting firms growing comfort in managing their portfolios using excess-of-loss protection, retaining more of the attrition and laying off peak loss exposure.

Howden explained that, “Importantly, quota share cessions are now falling as insurers become more comfortable with attritional and large loss ratios, a trend which is likely to continue as cedents explore more efficient capital structures such as event-based excess-of-loss products.”

Going on to say that, “Growing interest in this area has facilitated a series of landmark cyber catastrophe bond issuances since 4Q23. ”

Howden added that, “In addition to nearly doubling the size of the event-based excess-of-loss market, these transactions also point to a level of investor appetite that will drive additional activity from here.

“Room for growth is considerable; catastrophe bond issuance for property- catastrophe risk, a market that has existed for nearly 30 years, was around USD 15 billion in 2023 versus just USD 0.4 billion for cyber. Additional cyber deals have been closed in 2024.”

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“Continued investments into modelling solutions to manage and price systemic exposures have been (and will continue to be) crucial to unlocking more capacity from capital markets,” the broker believes.

“Work in this area will need to be sustained in order to accelerate inflows (at the right price). Innovation, and not cover restrictions, is the route to long-term relevance, and new possibilities.”

Jean Bayon de La Tour, Head of Cyber, International at Howden, commented, “Cyber insurance is key to strengthening resilience around the world and insurers are now in a strong position to bring about real change.

“This involves providing more capacity to meet pent up demand in currently underpenetrated regions, including Europe, Latin America and Asia, areas where Howden is investing strongly. The potential for growth is huge, particularly as most of these countries are coming off such a low base.”

Capacity remains key to discussions on cyber insurance and reinsurance and the unlocking of the capital markets has been an important step, which should help to ensure higher-layer excess-of-loss capacity remains more available and provides re/insurers another option for their cyber reinsurance and retrocession.