In a joint report with CyberCube and Envelop Risk, Lockton Re has highlighted how Insurance-Linked Securities (ILS) can support additional re/insurance capacity for cyber risk, and why it now has the momentum to succeed.
Lockton Re’s report, ‘Unlocking Potential’, notes that there have been discussions for many years on the potential of cyber ILS to transform the cyber insurance market.
Despite initial reluctance from investors, the report suggests that the conditions of the market today are at a point where this potential can be fulfilled.
This is due to there being an improved understanding of perils, better data to assess cyber catastrophe risk, and a growing consensus around model usage, says the report.
Models are now able to display statistical analysis based on actuarial probabilistic techniques to show a range of potential outcomes, effectively illustrating insured exposures. From this, a more focused scenario set has developed, based on market demand, which reflects the key priorities of cyber re/insurers.
Oliver Brew, the lead author of the report and London Cyber Practice Leader for Lockton Re, commented, “The mechanisms and methodology behind cyber modelling are becoming better understood, and the strength of the data and frameworks being utilised is increasing all the time, meaning the potential for cyber ILS investments can be leveraged to play a critical role in unlocking capacity required to continue developing the wider cyber insurance market.”
Further, the report states that there has been a large effort to educate potential investors, who typically are not specialists when it comes to cyber risks.
Lockton Re notes that these conversations are framed in the vocabulary of traditional catastrophe management, and that a lot of progress is being made as the pool of investors who are looking for new ways to benefit from catastrophe risk securitisation grows.
Brittany Baker, CyberCube Vice President of Solution Consulting and co-author of the report, said, “ILS investors are becoming more comfortable with cyber risk, but further education is needed on how cyber models work.
“Market-leading participants are increasingly demanding enhanced exposure management reporting that allows for more in-depth business intelligence reporting and more sophisticated strategic decision-making.”
David Ross, Executive Vice President of ILS & Capital at Envelop Risk, added, “There are compelling arguments that the time is right for investors to support cyber ILS. The class is in a secular hard market driven by increasing digitisation and growing insurance penetration.
“Those with access to data and a modelling advantage can build well-diversified and profitable portfolios to meet investor risk-return preferences. Structures exist to manage capital efficiently without dilution of returns from excessive collateral trapping.”
Oliver Brew concluded Lockton Re’s report by noting that the demand for cyber re/insurance which will only be further enhanced by the successful execution of cyber ILS transactions.
This follows news from the start of the year that specialist re/insurer Beazley had sponsored a ground-breaking cyber catastrophe bond transaction, designed to cover remote probability catastrophic and systemic cyber events (CyberCube’s Portfolio Manager was utilised as a part of the creation of the $45 million ILS transaction).
Speaking on this in a recent interview with Reinsurance News, Kyle Bryant, Chief Underwriting Officer at cyber risk solutions firm, Resilience, said, “I do believe that the news of the first cyber cat bond is really good for us as a market, I’m happy to say that it will create new opportunities for competition in how reinsurance is placed for cyber insurance.
“I think it’s going to bring some resiliency to the cyber reinsurance space, it’s not going to be immediate, but it’s a great start. This is something that’s been around for a long time, and there’s no reason it can’t work for cyber insurance.”
Elsewhere, Parametrix announced this week that it is working to bring ILS transactions to market which would protect ceding re/insurers against a sustained outage of “the cloud” to which many are exposed through their cyber portfolios.
