Insurance-linked securities investors wary of cyber

Insurance-linked securities (ILS) investors are proving reluctant to expand into the cyber market given uncertainty over the size of exposures and less financial risk diversification offered compared to natural catastrophes, S&P Global says.

Demand for cyber cover is surging while underwriting capacity is not keeping pace, leading to significant rate rises and a large protection gap, and offering a potential opportunity for ILS capital to enter the market.

But S&P says to date ILS interest is “rather limited”, varies greatly and in some cases, investors say they have no appetite for cyber risks.

“That is mainly due to the substantial accumulation risk, the potential positive correlation between cyber attacks and the financial markets, and the complexity and heterogeneity of cyber risks,” S&P says.

“Furthermore, cyber modelling is still in its infancy, many years behind natural catastrophe modelling, and less reliable, although information about cyber-related claims and response strategies is growing.”

Natural disaster risks offer diversification and real returns that are mostly independent of the capital markets, providing a clear diversification profile, but a big cyber event could trigger a decline or volatility in stock and bond market values.

S&P suggests cyber transactions may need to be simplified to whet appetite, potentially through parametric triggers, while focusing on cyber risks with shorter tails, and starting with one clearly defined peril, such as a cloud outage, could also encourage investors.

The ILS market overall has not expanded at the pace expected by some market participants five years ago, partly due relative investment returns and natural catastrophe impacts.

ILS provided around $US97 billion ($139 billion) in capital at the end of the first quarter, according to Aon figures in the report. The amount, which represents about 15% of the capital provided to the global reinsurance industry, has remained relatively steady since 2018, while capital from traditional sources has increased 12%.

S&P says it’s likely the cyber ILS space will grow “rather slowly” and is likely to remain niche in the short-to-medium term.