Insurance-linked securities (ILS) investors can sense opportunity in the growing cyber re/insurance market, but analysts at CyberCube believe that modelling capabilities must improve before this valuable source of capacity can be tapped.
As part of a new report, CyberCube argued that the financial impact of future global software failure could be so great that re/insurers will eventually require additional capacity from the capital markets.
The firm sees many parallels between cyber threats and the natural catastrophe risks that ILS capacity has been involved with since its introduction in the 1990s.
Examples of a systemic cyber failure could include the malfunction of popular software, a wide-scale cloud outage or a global virus infection.
But analysts believe that many technical hurdles must be cleared before ILS investors feel confident enough to enter the cyber market with any degree of certainty.
“For 20 years, the capital markets have played a vital role in providing capacity for peak risks where traditional (re)insurance capacity has not been available at acceptable terms and conditions, such as natural catastrophes,” said Rebecca Bole, CyberCube’s Head of Industry Engagement and one of the authors of the new report.
“Cyber shares many characteristics with these risks,” she explained. “The challenge, in what is still a developing cyber insurance market, is to find a way for investors to have the degree of certainty they need in order to support these products. Modeling is going to play a big part in creating the appropriate level of comfort with capital markets investors.”
Another factor that could build confidence in cyber ILS would be the existence of an industry-loss index, CyberCube suggested.
This would constitute a referenceable portfolio of data that would indicate trends or be used as the basis for a loss trigger in insurance-linked instruments.
“ILS investors sense an opportunity in the cyber risk market but are still treading carefully in what is a fast-evolving landscape,” said Laurel Di Silvestro, Principal Client Services at CyberCube.
“Unlocking the potential of ILS in the cyber market requires collaboration from right across the industry – brokers, carriers, investors and the risk modelling community,” added Di Silvestro. “CyberCube is committed to playing its part.”
