Financial innovations such as cyber catastrophe bonds could help bridge the cyber protection gap, according to a recent report by the Geneva Association.
As businesses and societies become increasingly digital, cyber threats such as ransomware, data breaches, and IT outages have emerged as top concerns. Over the past decade, the cyber insurance market has grown significantly, with global premiums rising from USD 1.5 billion in 2013 to around USD 15 billion in 2023. However, a significant protection gap for cyber persists.
The scale and unpredictability of losses from major cyber incidents make it challenging for insurers and reinsurers to handle these risks alone. Alternative risk transfer (ART) solutions, such as insurance-linked securities (ILS), offer a way to bring additional risk-bearing capacity from outside the re/insurance sector.
Historically, ART solutions—particularly ILS—have focused on property insurance, especially losses from natural disasters. Recently, however, cyber risks have started gaining traction in this space. Since early 2023, at least five different re/insurers have issued cyber ILS, including the first fully securitised cyber catastrophe bonds. This marks a significant milestone for the cyber insurance market.
For details on specific cyber cat bond deals, refer to the Deal Directory on Artemis, our ILS focused sister publication, where you can filter the list to view information about every cyber cat bond.
Broader ART solutions are also playing a role, including mechanisms that leverage traditional re/insurance balance sheets to turn cyber risks into investable opportunities. These solutions use various financing structures to appeal to a broader pool of investors with diverse risk appetites, including those comfortable with uncertainty about the size and frequency of cyber risks or willing to assume systemic (non-diversifiable) risks.
By spreading peak risks across multiple entities, financial innovations can better align capital with cyber exposures and promote more effective risk sharing.
Jad Ariss, Managing Director of the Geneva Association, noted, “Cyber insurance plays a crucial role in mitigating cyber risks, but scaling the market requires fresh thinking and new sources of capital. Tools like Cat bonds, which have predominantly been used so far for natural catastrophes, could significantly boost risk-absorbing capacity to cope with catastrophic cyber incidents and help narrow the huge global protection gap.”
Darren Pain, Director Cyber at the Geneva Association and author of the report, said, “Appetite for cyber ILS is clearly growing, but the market remains in the early phases of development. The complexity of cyber risks and wide variation in the extent of coverage in policies present challenges to widening the investor base. Progress in modelling capabilities and policy standardisation will be key to fostering confidence among investors and unlocking the potential of ART solutions for cyber risks.”
