There is diversification to be found within cyber cat bonds and ILS: CyberCube

CyberCube, a specialist modelling firm for cyber risks and exposures, has analysed the four 144A cyber catastrophe bonds that have been issued to date and found that there is diversification between them, which it says means these first deals provide a solid base for future innovation.

Some $415 million in 144A cyber catastrophe bonds were issued in the latter stages of 2023, as the nascent cyber insurance-linked securities (ILS) market gained long-awaited traction.

In response to concerns that have been raised over whether the group of cyber catastrophe bonds issued so far are correlated with each other, CyberCube has performed a technical analysis of those deals, saying that it demonstrates the potential for risk diversification between them.

The risk modeller has analysed the specific characteristics of the four 144A cyber catastrophe bonds issued in Q4 2023 and examined the potential for correlation between them.

To do this, the company used its probabilistic cyber catastrophe model Portfolio Manager to run 50,000 simulation years to create an extensive event set of potential systemic cyber events.

The goal is to address investor concerns regarding the presumed potential for correlation to emerge in the cyber ILS asset class.

CyberCube says that its analysis of the 144A cyber cat bonds shows that “diversification within cyber as an asset class is possible despite systemic cyber events not accumulating across easily visualized fault lines. ”

Concluding that the 144A cyber cat bonds issued to date provide a solid base for future innovation.

CyberCube has published a whitepaper on the topic, titled “Digital Ties and Natural Divides: Correlation and Diversification in Cyber Catastrophe Bonds,” which it hopes will help to address the concerns of investors regarding the presumed potential for high correlation. A copy of the whitepaper can be downloaded here.

Brittany Baker, CyberCube’s Head of Solution Consulting, said, “The research leverages CyberCube’s unique position as the only modeling vendor to have worked with all sponsors to provide an expert view of risk for all the 144A cyber catastrophe bonds that have gone to market to date.

“By going beyond a surface-level analysis of potential systemic cyber losses, we hope this whitepaper enables investors to understand the diversification potential between bonds within this new asset class.”

Jonathan Choi, CyberCube’s Director of Insurance Risk Consulting, added, “Today, the cyber catastrophe bonds that have gone to market cover a wide array of cyber risks under a single umbrella, mirroring the early days of the natural catastrophe bond market before it evolved to cover specific perils like earthquakes, hurricanes, and floods.

“As the cyber (re)insurance market continues to mature, more nuanced approaches to managing systemic cyber risk will surface, unlocking innovative strategies for the transfer of cyber risk.”

Also read: Cyber cat bonds issued so far “highly correlated” with each other: Plenum.

Read all about the cyber catastrophe bonds that hit the market over the last year or so, three private deals and the four more recent full Rule 144A cyber cat bonds.