Many insurers linked to insurance (ILS) are hesitant to allocate funds to cyber insurance and reinsurance risks, leading the regulatory agency S&P Global to indicate that the growth of the cyber ILS market may slow in the short term.

With market conditions for insurance-linked businesses (ILS) seemingly improving after several years of difficult natural disaster risks, S&P says cyber ILS may be seen as a major opportunity right now.

The cyber insurance market is facing the need to protect the end customers, but the power provided in the cyber insurance and the cyber reinsurance (and retrocession) market is not working well so far.

This is creating a gap in cyber security, S&P Global Ratings believes, something that could be an opportunity in the insurance-linked security (ILS) market.

“In our opinion, the cyber insurance market now offers ILS investors the opportunity to expose themselves to cyber risks as they did to natural risks ninety years after Hurricane Andrew in 1992,” S&P Global Ratings credit analyst Manuel Adam explained. .

But despite the obvious opportunities, as we have said many times over the years, the lack of cyber reinsurance and cyber retrocession have made it difficult for cyber insurers to increase their writing significantly, resulting in a lack of leverage and a lack of leverage. failure to meet customer requirements for cyber security.

But although cyber ILS and cyber catastrophe bonds have always been discussed and we are aware of several initiatives that are underway to provide cyber ILS instruments, as well as small private cyber ILS transactions, the growth of the cyber ILS market has been slow until now, something so S&P believes it will.

“So far, ILS traders have not shown much interest, and we believe that the growth of cyber ILS will be slow over time,” said Adam.

S&P offers several reasons for the reluctant response of ILS investors to the cyber threat opportunity.

First, and perhaps the main reason for any skepticism at this time when the recent years of disaster and secondary risks are fresh in mind, ILS investors “have learned the hard way that they may be exposed to risks that they did not adequately reflect. and / or the price,” S&P said.

Secondary risks appear to be on the rise, leading to higher-than-expected losses, S&P said.

Since cyber risk is not limited by region and can spread globally, this can expose investors to cumulative risk and related losses, which increases uncertainty in the distribution of cyber ILS funds to others.

A second reason for procrastination is the increased potential for communication and exposure to cyber risk.

The general ILS market is highly exposed to natural disaster risk because the real exposure means that ILS funds often offer diversification and real returns that are often independent of the capital markets, the S&P index.

A major cyber loss event can cause a decline or volatility in market prices and bonds, or be related to them, so this means that cyber ILS can have a high correlation with capital markets.

On top of this and causing uncertainty among ILS investors, cyber risk can be very difficult and the adoption of cyber risk can also be.

S&P believes that: “The risk of failure can be avoided,” it says, “The easiest way is to start with one common cyber problem, such as a cloud outage, a service provider outage, or an attack on a critical infrastructure, rather than multiplying it.” risks, will help investors to better understand the risk they cause, and, as a result, assess their risk.”

S&P went on to explain in its report on the matter, “One way to attract ILS investors to the cyber insurance space would be to offer different cyber risks that could change the portfolio of ILS investments.

“Another way would be to focus on simple and acceptable cyber events with clear definitions of risks, and establish ILW products that have the risk of damage to cyber companies. This prudent approach can help investors to better understand the risk of the cyber tail.”

In addition, the rating agency wants to have multiple entry points for investors to assess their appetite for cyber risk in the form of ILS, which would also provide alternative ways to adjust the risks of cedants.

“Having more entry points for investors and the opportunity for (re)insurers to transfer real and perceived risks to the broader market will help advance cyber insurance,” S&P said.

Comments from ILS fund managers show that investors’ appetite for cyber risk in the form of ILS “is low and varies widely,” S&P explained.

Adding that, “Some investors have reported that they are not interested in cyber risks. This is mainly due to the increasing number of threats, the poor connection between cyber threats and financial markets, and the complexity and diversity of cyber threats.”

The fact that cyber risk systems are still in their infancy, compared to risk models, is also hindering the development of the cyber ILS market, but S&P says that information about cyber-related claims and response strategies is growing.

As a result, S&P believes, “The cyber ILS space will grow slowly and may remain volatile in the short term.”

But the evaluation agency sees the growth of the market in simple, one-off cyber risks, such as start-ups, or by looking at short-term risks, covering events that can be clearly defined (such as the downfall of the cloud), or in tools such as industrial loss guarantees (ILW’s). using a trigger that is strongly defined and supported by a recognized third party, such as PCS.

One positive development in cyber reinsurance that may help attract investors to ILS in time is the shift to claims-made, risk-based products.

ILS investors want to know that they are only going to lose for the duration of the risk-based contract, so they tend to recoup large amounts of losses.

As the cyber threat market moves in this direction, it could open the door to more markets, depending on the shortening of the cyber tail exposure.

Our upcoming ILS conference in London will feature a panel discussion on the potential of cyber catastrophe bonds and a keynote on ILS cyber disaster preparedness models. Tickets are still available..

Tickets are selling fast for Artemis London 2022, our first ILS conference in London. September 6, 2022.

Register soon to ensure you can attend.

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