Insurance-linked securities & the future of cyber reinsurance

In the coming year, reinsurers will work with insurance-linked securities (ILS) fund managers to increase cyber reinsurance capacity, according to a forecast from CyberCube.

This prediction comes as demand for cyber insurance has traditionally outpaced the insurance industry’s capacity or willingness or write these risks. At the same time, the natural catastrophe ILS market has been shaken in recent years, according to CyberCube, which noted this is increasing the need to “present new asset classes to investors in a way that wasn’t necessarily required previously.”

As it stands, cyber has already found its way into the mandates at different funds and investment groups, which are building a better technical understanding of these risks, CyberCube reported.

“While there have been a few private cyber ILS transactions in the past, the industry is still waiting for the first 144a cat bond,” Brittany Baker, vice president of solution consulting at CyberCube, wrote in a report. “2023 is ripe for this to occur due to more sophisticated modeling, the development of industry exposure databases, and an increased understanding of cyber risk across the necessary stakeholders.”

However, the first 144a cat bond must be “simple and repeatable” for the cyber ILS market to grow, according to Baker. They also must include clearly defined covered perils and event definitions to entice investors.

“Modeling and reporting agents have to prove they are up to the task — some may have experience in the nat cat world but others will be new to the game and will need to prove their value to the financial markets,” Baker wrote.

Related:

• The case for non-CAT property insurance-linked securities
• Improving cyber insurance doesn’t have to be hard
• Common mistakes to avoid on cyber insurance applications