Quota-share format may be more suitable for cyber risks than cat bonds: Bruns, LGT
Although Christian Bruns, Partner and Portfolio Manager at LGT ILS Partners Ltd., noted that transacting cyber risk in an excess-of-loss format may not currently be in the best interest of the firm’s investors, he highlighted the potential to transact the risk in a quota-share format through its in-house rated reinsurance carrier, Lumen Re.
Speaking with Artemis in an interview at the beginning of the reinsurance conference season, Bruns stated that LGT ILS Partners has not allocated to cyber risk transactions so far but is assessing each new transaction, having frequently met with the sponsors of these deals in one-on-one meetings to discuss structures.
According to Bruns, following assessment work around the recent cyber cat bond transactions presented to the market, LGT ILS Partners has concluded that the risk modelling for cyber events is still “somewhat in its infancy”.
He continued, “Vendor model providers and broking firms are applying different approaches to assess the risk level of individual transactions, and the results vary, leaving significant room for interpretation.
“We do, however, acknowledge that underwriting cyber covers for a primary insurer is currently a very attractive business line.”
Bruns explained that actual catastrophe loss activity in this area has been low in recent years, and premium levels charged are robust, leaving insurers in a very healthy positive position.
“However, cyber cat bonds are structured as excess-of-loss deals; the premium (coupon) is fixed for the term. The trigger for the payout of these bonds is met if the sponsor (or the market) is suffering from specific monetary loss stemming from a cyber event,” he added.
Bruns went on, “The return for investors, i.e. the risk-takers, is thus fixed, and there is no link to the profitability of the underlying exposure.
“The sponsor decides where trigger levels should be set, thereby adding to the uncertainty around the risk assessment.
“Our conclusion is, therefore, that for such a novelty risk as cyber, excess-of-loss reinsurance transactions are not an optimal form of assuming this risk as a capital provider.”
As per Bruns, the most relevant coverage provider for cyber insurance is the world’s largest reinsurers, and naturally, the transaction structure of choice for virtually all traditional cyber reinsurance covers is, therefore, a quota-share agreement.
“Under such an agreement, the insurer is passing on a specific share of the premium and, in turn, will collect the same participation on the loss amount,” he said.
Bruns added, “For the reinsurer, this allows for full participation on the upside in a quiet year and, hence, to benefit from the rather high premium income prevalent in cyber at this stage.
“Thus, it comes as no surprise that there are virtually no excess-of-loss cyber reinsurance deals transacted in the traditional reinsurance market – only the cat bond market is providing this form of capital, which further underlines the attractiveness of these transactions for the sponsors.”
He concluded, “In summary, we believe that transacting a fairly new business line such as cyber in excess-of-loss format is not in the best interest of our investors, and we have thus not supported these recent cyber cat bonds.
“We are, however, assessing the market and may transact this risk in quota-share format through our in-house rated reinsurance carrier Lumen Re.”
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