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Reinsurance capacity not keeping up with cyber demand: S&P

31st August 2022 - Author: Pete Carvill

S&P Global Ratings says in a new report that while the demand for cyber risk protection is growing, the capacity for reinsurance in this sector is not keeping the same pace.

cyber-securityAt the same time, S&P said, the conditions for insurance-linked securities (ILS) investors are improving after several difficult years due to a growing number of natural catastrophes.

Manuel Adam, credit analyst at S&P, said: “In our view, the cyber insurance market now presents an opportunity for ILS investors to gain exposure to cyber risks in the same way they did with natural catastrophe risks in the nineties following Hurricane Andrew in 1992. However, so far, ILS investors have not shown much interest, and we believe that growth in cyber ILS will be slow in the short-to-medium term.”

S&P said there were a number of reasons for this. Firstly, it said that ILS investors have learned the hard way that they can be exposed to perils that they had not fully modeled and/or priced for. It also said that in recent years, secondary perils have increased in frequency, and, in aggregate, resulted in higher losses than investors had expected. Cyber risks are not limited by region and can easily spread across the globe in a few seconds, exposing investors to accumulation risk and related losses.

It also said that ILS with exposure to underlying natural disaster risk offer diversification and real returns that are mostly independent of the capital markets. In contrast, a big cyber event could trigger a decline or volatility in stock and bond market values, increasing the correlation with the capital markets.

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It wrote: “Lastly, cyber ILS transactions can be very complex, and complex transactions are likely to fail. A more simplified approach, starting with only one defined cyber peril, such as a cloud outage, a service provider outage, or an attack on critical infrastructure, instead of multi-peril agreements, will help investors better understand the underlying risk, and, as a result, quantify their risk exposure.”

The firm also called for scenario modelling that it said will be key for investors taking on cyber insurance underwriting risks.

It said: “We see an opportunity for the ILS sector to be the first to focus on ILW products using industrywide estimates for each event, resulting in a cyber industry loss index trigger.  Focusing more on ILWs using industry loss triggers would help investors to improve their understanding of cyber tail risk and could be an entry point for the ILS sector.”

It concluded: “In view of the challenges mentioned above, cyber ILS transactions can be very complex, and complex transactions are likely to fail. A more simplified approach, starting with only one defined cyber peril, such as a cloud outage, a service provider outage, or an attack on critical infrastructure, instead of multi-peril agreements, will help investors better understand the underlying risk, and, as a result, quantify their risk exposure.”

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