Reinsurance News

Cyber ILS deals a “stepping stone” to market acceptance: Fitch

3rd February 2023 - Author: Matt Sheehan

Analysts at Fitch Ratings have said that the two recent public announcements of cyber risk transference by re/insurers to the capital markets through insurance-linked securities (ILS) issuances represent the potential for a broader reinsurance source for the risk.

While development of the cyber risk transfer market requires further maturation of the product, Fitch maintained that these recent deals could be a “stepping stone” to wider market acceptance.

Fermat Capital Management was the main investor to the Beazley-sponsored Cairney cyber bond of $45 million that provides excess-of-loss (XoL) coverage for cyber claims exceeding an attachment point of $300 million.

And Stone Ridge Asset Management provided the funds for Hannover Re’s $100 million collateralized reinsurance deal on a quota share (QS) arrangement.

Cyber insurance currently represents less than 1% of the nearly $800 billion of total US industry direct premium written but is the fastest growing product line with premiums expanding by 73% in 2021 to $4.8 billion.

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Fitch therefore believes that capital markets solutions for cyber re/insurers present the significant potential for counterparty diversification and an opportunity to lessen tail risk for a rapidly growing product line of P&C insurance.

But significant obstacles remain before there can be wider utilisation of ILS solutions in the cyber market, it warned, including greater standardization of coverage terms and policy language, price discovery and risk modelling applications.

“Cyber risk is difficult to assess due to the dynamic, man-made root causes of claims. Challenges include a lack of widely accepted modelling tools and a limited data set of historical claims where past events are not necessarily indicative of future risks,” Fitch noted.

The rating agency contends that most early deals within the ILS cyber risk transfer space will likely be comprised of cyber risks that are easier to model and quantify and will be of modest size.

“Although cyber risk has been transferred to capital markets on a private basis through collateralized reinsurance deals, these public transactions may represent a stepping stone to broader market acceptance that provides insurance companies additional capital, lessens counterparty risk, and a future vehicle for cyber catastrophe coverage,” Fitch concluded.

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