Transparency key for investors as ILS looks to cyber and beyond: ILS NYC 23

The current growth trajectory of cyber risk suggests it could become the biggest exposure in the market, and while the recent cyber ILS deals and first cyber catastrophe bond are a positive development, transparency is vital, say industry experts.

The final panel at Artemis’ annual insurance-linked securities (ILS) conference in New York City, held in early February 2023, kicked off with a discussion about whether increased transparency would lead to a better marketplace for cyber risk.

“The transparency is huge because we all know what’s going on, investors fear the non-transparency, right. What are you not telling me? That’s the whole problem,” said John Seo, Co-Founder, Managing Principal, Fermat Capital Management.

“The stakeholders way up here, if they feel like there’s just one tiny little thing that you’re not disclosing to them, it could scuttle the whole thing. And of course, that’s my view as well. It’s the tiny things that can actually kill the whole picture,” he continued.

The panel was moderated by Artemis’ Steve Evans, who noted the importance of transparency when going out to speak to the market.

“I often speak with investors who don’t really understand the level of scientific development that can go on at an ILS manager, in terms of trying to understand the risk better, or trying to price it better for the next renewal,” he explained.

In response, Seo said that investment managers, the people managing the risks, are happy to be open and transparent but that at times, advice from sales channels can be to not mention anything that’s not currently included in the fund.

“By the numbers, cyber should actually be the biggest risk in the market, it will be bigger than earthquake and hurricane combined. I don’t know if it will be, but that’s the trajectory that it’s on,” said Seo.

Panellist Tom Johansmeyer, Head of PCS, Verisk Insurance Solutions, told the audience that the trajectory of cyber is something that makes him nervous, because the market keeps obsessing over the premium number, and isn’t focused enough on the amount of limit.

“And that’s a big problem. We’ve seen premium outpacing limit rather significantly, for what, two years now. And the question is, okay, how much more can you charge for a stable base of limit? So, at what point does this relatively fixed number become too expensive, and the market turns the other way?” questioned Johansmeyer.

He went on to stress that the first thing the market needs to do, is ensure that it’s delivering a valuable product, which hasn’t always been the case with cyber.

“We have to communicate it, and then we have to find a way to bring in the capital behind it to make this sort of trajectory possible. I mean, even now, if we could find a way to bring pricing into some sort of reasonable line with the limit outstanding, to create this trajectory that you’re mentioning, we then need to find the further capacity to fuel that. And that to me does operate on a lag. So, with that lag, intervening geopolitical issues can torpedo the whole thing, again,” he said.

The day’s fifth and final panel also featured Mark Gibson, Head of Products & Solutions ILS, Schroders Capital, who explained some of the reasons why his firm isn’t yet looking too closely at the cyber ILS space.

“The things that I look at with cyber when we talk about it internally, is trying to get our arms around the nature of the risks, the nature of the sources of risk, the sources of loss. And then even if you can get your arms around the nature of it, then the probability of losses, this sort of thing, obviously, there’s a view about it. Whether that view is within a reasonable percentage of likelihood or not, I think is still very difficult to assess,” he said.

Whether property cat risk, cyber risk, or another non-cat exposure, as with transparency, profitability for investors is an extremely important part of ILS and drives interest from new and existing investors.

This point was raised by an audience member, and panellist Judith Klugman, Global Head of ILS Distribution, Swiss Re Capital Markets, noted how, fundamentally, it’s a different market this year as yields have risen significantly, especially in the cat bond space.

According to Klugman, in the cat bond sector, underlying spreads have risen 80% year-on-year, and the market yield has increased by around 14%.

“Those are numbers that just in and of itself are attractive to a broad base of investors and are sort of generating their own enthusiasm, certainly with the new crop of investors who are looking at this not only on a relative value basis, but as well as a wonderful diversifier. Because I think that that fundamental core of our asset class, that it’s diversifying, I think that that has never been truer,” she explained.

Adding, “I think that this current spread environment that we’re in is very attractive. Maybe it tightens a bit, but I think that fundamentally, it’s a very attractive market… I think that there’s real attraction to end investors on both diversity and that it has real relative value. And so hopefully, it’ll stay that way. It should.”

We’ll bring you more articles covering highlights from the event over the coming weeks and in time every ILS NYC 2023 session will be available in video and as a podcast episode as well, so do look out for that. Some initial photos of the day are available here.

Thank you to all of our speakers, sponsors and attendees for their support for Artemis ILS NYC 2023. We hope you enjoyed the day and we look forward to seeing you next year!

View some photos from the day here.

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