11 April 2023ArticleNews

New cyber ILS deals mark watershed moment for the market

January 2023 could come to represent a watershed moment in the development of the insurance-linked securities (ILS) markets. After almost a decade of wrangling and debate by the very best dealmakers in the risk transfer landscape, not one but two cyber ILS deals finally came to market.

First Beazley, then Hannover Re brought the deals. They are very different and thus significant in their own ways, but their importance cannot be overestimated. Visionaries within the industry are clear that cyber risk will become as important to the risk transfer landscape, and as big in terms of gross written premiums, as property or casualty business—the term PC&C has even been coined to represent these three strands.

The notion that capital markets investors could become comfortable taking this risk represents a further game-changer—for many reasons.

This new capacity could add long-term stability and transparency to a market, and should help policyholders at all levels ultimately be more able to secure the capacity they need at an affordable price over time.

Those were some of the thoughts of a panel of experts asked to explore these themes in a virtual panel discussion on this topic, “Cyber cat bonds and the future development of ILS”, organised and moderated by Intelligent Insurer, Bermuda:Re+ILS' sister publication. Lawrence Perret-Hall, director, CYFOR Secure; Jonathan Drake, partner and law insurance expert, DWF; and Juan Marcano, principal, cyber alternative risk transfer, CyberCube, offered three distinct perspectives on this issue.

In addition to this article, further comments from these experts can be found here. Perret-Hall noted that cybersecurity is exploding as a challenge, with the issue of ransomware representing the biggest challenge. He said insurance policies to date have struggled to cover ransomware but this may change with new capital entering the market in this way.

“With this new capacity coming in, we may see policies becoming more robust over time,” he said. “I hope that will be the case all the way from large companies to small and medium-sized enterprises (SMEs), so that they can transfer that risk away from having to stomach those costs themselves.”

Perret-Hall highlighted a trend in recent years of SMEs being seen as easier targets by hackers who saw them as “low-hanging fruit”, but he acknowledged that the availability of ransomware insurance could encourage attacks on larger companies again. But, overall, he believes these deals represent a big step forward for the market.

“We’re a big advocate of cyber insurance as well as technical defences, and we work quite heavily on the proactive side with insurers to make sure that we can quantify risk and then get an affordable policy in place,” he said.

“It’s exciting for insurers. Access to more capital is going to have an impact on the policies for companies of whatever size. We want policies to remain affordable to some of the smaller companies, but we see insurers having a real appetite now to protect their business, to respond to claims and secure repeat business. We are starting to see that mindset changing.”

More discipline

Marcano said a key advantage of the participation of capital markets in the cyber space is an increase in discipline and clarity. He expects a clearer definition of the risk and what is, and what is not, covered.

“In the end, it will lead to better terms for the insured and more participation from capital markets. Capital markets like to have a clear line of sight in terms of the risks they’re undertaking and clear definitions of the policies and the events. That will help a significant amount,” he explained.

Drake agreed that the effect of these deals should eventually trickle down to have a positive impact through the entire risk chain to SMEs. “It’s good because it means a growing level of trust and consideration around indemnity risks.”

He suggested these deals could pave the way to investors considering taking other forms of risk. “In principle, maybe investors will consider taking other complex risks where there’s not a lot of capacity. Maybe they can model that and bring those same disciplines to the area.”

Marcano agreed that this breakthrough could herald the start of increased interest by ILS investors in other new asset classes. “Is there an opportunity there for other asset classes? I will say so. A couple of startups are starting to find innovative ways to bring capital markets to other asset classes using artificial intelligence and machine learning.

“It’s the availability of data and what to do with that data that is driving the opportunity for new asset classes,” he said.

Drake cited the driving force for some other major breakthroughs in the risk transfer industry: necessity. He noted how Hurricane Andrew in 1992 triggered an intense investment in catastrophe modelling capabilities and an appetite to better understand those risks. “When the pressure is on—that’s what drives people to come up with new and alternative ways of trying to find insurance for these risks,” he said.

Marcano added that he was bullish about the further development of cyber ILS. “You need focus, you need discipline, and we’re now going to get standardisation and well-written policies that reflect the risk taken by the capital markets.

“That will ease the pressure in terms of the levels of coverage and the premiums we’ve seen over the last couple of years. Ultimately, all that will benefit the entire value chain because it will lead to commoditisation, where prices will come down and more capacity will flow in.”