Cyber insurance market needs cat bonds & ILS capital to support expansion: ILS NYC 2024
The nascent cyber catastrophe bond and insurance-linked securities (ILS) market must grow to support the need for cyber insurance coverage, as traditional reinsurance risk tolerances are reached and the capital markets provides the perfect alternative, speakers at our recent ILS NYC 2024 conference explained.
This panel session at our ILS NYC 2024 conference on February 9th was focused on cyber catastrophe bonds and ILS, discussing what had gone well with the issuance that has already been seen and what can be supportive of cyber ILS’ future growth.
With cyber cat bonds having their break-out year in 2023, our conference in early 2024 was the first to dissect the activity, with a panel featuring a number of industry participants that played important roles in the first cyber cat bonds getting issued.
The panel session was moderated by Jo Syroka, Director of New Markets at prominent investment manager Fermat Capital Management, LLC.
Syroka said that after the strong start, the next job for the cyber catastrophe bond market is to scale up to support the needs of cyber insurers.
“While that’s a very impressive start, the reality is, I believe, is the 144A cyber market will have to grow significantly, if it’s to support the growth ambitions of the cyber insurance market,” Syroka explained. “Or put another way, if the cyber insurance market wants to make its large growth projections, it’s going to need alternative capital and the ILS technology that we have in the market.”
Syroka went on to explain why that capital is going to be needed and why insurance-linked securities (ILS) are the answer.
“Cyber is very different from property,” Syroka said. “Property is obviously geographically diverse, so a hurricane’s not going to hit New York, London, Tokyo at the same time. But a virulent malware could potentially do that and that means, for a much smaller premium base, traditional balance-sheets are going to start reaching their risk tolerance limits.
“If we were talking about a market that’s growing so rapidly, very soon it will get there and traditional reinsurance balance-sheets will reach those same risk tolerance limits that they did for hurricane and earthquake many years ago and cyber will become a peak peril.
“What’s the solution to the peak peril problem? Well, that’s the capital markets and it’s the ILS market that doesn’t have the same constraints as traditional balance-sheets.”
Also participating in this session was Kyle Freeman, Head of ILS Structuring, Property, at AXIS ILS and a person deeply involved in his firm AXIS Capital’s sponsorship of its first 144A cyber cat bond at the end of last year.
Freeman concurred on the need for capacity, saying, “It’s not necessarily something that we needed immediately, but we definitely saw in the very near future, the need for additional sources of capacity, as traditional reinsurance markets are starting to get stretched a little thin.
“We foresaw that over the next few years, we’re going to need that additional source of capacity, which I think is something you should always be looking for any way. You always want to have more than one pot of money to go to, in case something were to go wrong.
“If you had a large event, you don’t know which one is going to be functioning properly. So you want to have multiple options.”
Freeman of AXIS ILS also noted that industry dynamics have seen cyber insurers becoming increasing comfortable with retaining more risk and attritional exposure, which has now left them looking for tail risk protection, somewhere the catastrophe bond market excels.
“We’ve seen a large increase in pricing on the insurance side and that’s helped insurers, along with some innovation on their part, get more comfortable with the attritional side of risk. So they’ve had some ability to lessen up on the quota shares, take that more on their own balance-sheets, and then look for outlets for the tail and cat bonds of course fit that bill properly,” Freeman explained.
Also participating in this panel discussion at our New York conference was a representative from the earliest of the cyber cat bond adopting sponsors, Beazley.
Richard Gray, Head of Third Party Capital at Beazley, said that his company was all too aware of the need for capacity and that new markets would be needed to absorb some of the cyber risk the firm has been underwriting.
Gray explained, “Perhaps the issue was slightly more immediate for us, because we’re a bigger part of the market share, but we have no shortage of quota share out there.
“But, this comes back to the capital modelling point that was raised initially, there isn’t a tremendous amount of excess-of-loss out there and therefore, we need the cyber ILS market to sit alongside the traditional excess-of-loss market and obviously enable us to grow, and not grow for growth’s sake, but because the demand is there.”
On cyber protection itself, Gray said, “It’s seen as a critical part of risk management for most enterprises so it will continue to grow. We will continue to innovate, we will continue to be part of that growth and, to do that, we have to have the appropriate capital available.”
Bringing the view of a specialist risk modelling company to the panel discussion, Brittany Baker, VP of Solution Consulting at CyberCube explained the extensive work that was undertaken to help investors gain comfort with cyber as a risk in the catastrophe bond market, as well as in providing modelling insights to help investors in comparing the early 144A cyber cat bond deals.
She also noted that the risk modelling firm knew that with capital markets participation, comes great scrutiny, so CyberCube ensured it was ready.
“Over the past year we released our Version 5 last summer and our head of analytics was really focused and conscious about what will the ILS market need, as well as the rest of the insurance industry,” Baker said.
This translated into, “How can we be even more transparent, the documentation, thinking through all of our assumptions and knowing that if and when this market opened, it would be that next level of scrutiny and those next level of questions.”
Baker further explained that, “So we were really, really conscious to prepare for those types of questions and scrutiny, and just that level of detail.
“We’ve always had it, but we knew that that was coming and it was imminent.”
Finally, rounding out the cyber ILS panel at our ILS NYC 2024 conference, Richard Pennay, CEO, Insurance-Linked Securities at Aon Securities, said that one of the things going in cyber risks favour is the fact that the peril can be likened to a peak catastrophic peril, so investors had familiarity with certain concepts and could get a feel for the early issuances more readily.
“I think the beauty of what has been achieved in the cyber space is actually that the underlying product, that investors are assuming, represents and relates very closely to the property catastrophe bond,” Pennay explained.
He continued, That’s because what we’re talking about is actually pretty similar, in the sense that the indemnity based occurrence bonds have an event definition that really speaks to the fact that we are dealing with a cyber event that is truly catastrophic.
“So when you look at the structure and the way in which these transactions were put together, they do mirror and resemble what investors have been used to.”
Pennay went on to explain that investor acceptance of the first cyber catastrophe bonds has been encouraging.
“At the last Artemis conference in London, the question was asked whether deals would get done in 2023? I think we would all agree that $400 plus million would be a very sizable amount that the markets been able to digest and the way it did that was that the participation on the deals today have been broad,” Pennay noted.
Read our other coverage from this ILS NYC 2024 event.Video / audio of every panel session will be available in the coming weeks.
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