Hannover Re, one of the world’s largest reinsurers, has, for the first time, transferred cyber risks to the capital markets via a proportional reinsurance solution, with New York-based Stone Ridge Asset Management supporting the transaction with USD 100 million of capital.
The German reinsurer has created an additional retrocession tool that enables capital market investors to participate directly in its cyber risks through a quota share cession.
This debut transaction covers cyber risks in Hannover Re’s worldwide portfolio and has a long-term orientation, and it’s hoped that the firm will be able to build on this deal and grow its relationships with insurance-linked securities (ILS) investors.
Silke Sehm, a member of Hannover Re’s Executive Board whose responsibilities includes retrocession and ILS, commented: “For the first time, we were able to transfer cyber risks to the capital markets, and on a substantial scale, through a proportional reinsurance solution. This underscores our lead role as a bridge builder between the capital markets and the insurance industry.
“We want to build on this initial success and further expand our cooperation with capital markets investors, extending also beyond our own retrocessions.”
For Hannover Re, the transfer of cyber risk to the capital markets is another innovative step in its own protection strategy outside of its traditional retro programme for catastrophe risks.
The reinsurer is prominent in the ILS space. Since 2013, it has brought an extreme mortality cover for the life and health reinsurance business to the capital markets in regular tranches, and has also transferred some of its nat cat risks to ILS investors through catastrophe bond issuances, among other things over the years.
In fact, Hannover Re says that it has been participating in the ILS space since 1994, noting that it utilises the entire ILS spectrum to transfer risks for its clients and cover its own risks. In 2022, the company transferred roughly EUR 8 billion to the capital markets.
“We are proud to have achieved this milestone together with Stone Ridge and see further considerable potential for the transfer of cyber risks to the capital markets using the entire ILS toolkit,” said Henning Ludolphs, Managing Director for Retrocession and Capital Markets at Hannover Re. “Given the strong demand, our clients rightly expect us to make adequate cyber capacity available to them.”
Ross Stevens, Chief Executive Officer of Stone Ridge, added: “Stone Ridge investors value our approach to sharing the proportional business of select, leading reinsurers, as we now add cyber risk to our more than USD 60 billion notional limit deployed since our inception in 2012.
“Cyber reinsurance represents a natural addition, and diversifying complement, to our other alternative investment franchises, as investors increasingly turn to Stone Ridge for investment outcomes superior to stocks and bonds. The market for cyber risk transfer is attractive given our expectation of high average returns and low correlation. With this transaction, we are thrilled to expand our treasured partnership with Hannover Re, extending our trading relationship beyond catastrophe and life risks, and we are just getting started. We intend to meaningfully grow our cyber exposure throughout 2023 and beyond.”