ILS Investors Can Help Fill Cyber ​​Re/Insurance Gap as Barriers End

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The cyber re/insurance gap presents an opportunity for insurance-linked investors (ILS), which have historically filled gaps where traditional funds have been excluded or non-existent, according to a report published by S&P Global Ratings.

“The need for protection against cyber risk is increasing, but the power provided by re/insurance is not growing at the same rate, resulting in a significant increase in policies and a gap in protection,” said a report called Cyber ​​​​Risk in a New. Era: The Future of Insured Security in the Cyber ​​Market​​​​​​ Looks Uncertain. “

This difference in security may give ILS investors an opportunity to identify cyber risks, as they did with natural risks after Hurricane Andrew in 1992, the report said, however, cyber risks, so far, are more of a distraction than an incentive for ILS investments. .

Source: S&P Global Ratings

Indeed, many investors are not interested in cyber risks, which S&P said are “due to the increasing risk, the strong correlation between cyber attacks and financial markets, and the complexity and diversity of cyber threats.”

In addition, cyber modeling is still in its infancy and is many years behind the modeling of natural disasters, said S & P, noting that, therefore, cyber modeling is very reliable.

The report stated that natural disaster risks continue to dominate ILS with natural disasters representing 94.03% of sales; health care at 2.10%; job risk at 1.21%; life integrated cost at 1.08%; cash guarantee at 0.66%; Accidental death at 0.58% and terrorism risk at 0.34%. (S&P provided these figures from Artemis).

The Risks of Cyber ​​ILS Accumulation

Discussing the problem of increasing ILS cyber risks, S&P said that underreporting, or silent reporting on cyber risks, already exists in ILS practices, as cyber activities can lead to claims in other businesses, such as property and credit insurance.

About 90% of ILS fund managers are concerned about cyber exposure within their funds, said S&P, citing PCS, Verisk’s business and risk information provider.

“Since cyber privacy claims can be a problem for some insurance businesses, ILS funds for operational or property risks already have a cost of cyber risk,” the report said.

“Currently, there are no bonds or guaranteed sidecars, but there has been a small amount of cyber-related ILS activity as a way to connect with some of the Bermuda-based ILS carriers,” S&P said.

defined, cyber risks, helping them to better understand the causes of risk and ensure that they are faced with them. “

S&P Global explains that ILS capital is invested in the insurance industry in a variety of ways, including risk bonds; sidecars (structures that allow for private investment in insurance risks); collateralized reinsurance; and industrial loss guarantees (ILW), which are reinsurance contracts that come into effect when a company’s losses reach a certain level.
“The main purpose of the ILS capital is to assume (underwrite) the risk where there is high exposure to ensure that, in the event of a major loss, the risk is not only shared between the global reinsurance companies and their loans and investors, but also between investors in capital markets, ” said S&P.
These products allow investors to protect their income and capital against natural disasters, while investors can diversify their portfolios by creating investments that have less correlation with other financial markets, the report continued. “Historically, as long as the rates were attractive, ILS capital has filled gaps where traditional funds have been eliminated or non-existent.”

How to Increase Investor Interest

“One way to attract more ILS investors to cyber insurance would be to offer simple, one-to-one transactions, transparently.

An ILS architecture that focuses on well-defined cyber risks can help separate cyber from property risks, S&P explained. While a clear separation will not eliminate the issue of silent cyber, “it will highlight the need for a clear and robust separation of cyber security to lower the cost of insurance to prevent silent cyber claims,” ​​the report said.

“Furthermore, it can promote a more transparent and transparent integration of risks within cyber insurance contracts, thereby creating transparency, which is also possible for ILS investors.”

Another way to encourage investors to ILS would be to “focus on simple and legitimate cyber activities with a clear definition and implement ILW. [industry loss warranties] products that have a risk of loss to the cyber industry,” the report said. (See sidebar of this article).

“This careful approach can help investors better understand the cyber tail risk. Having more entry points for investors and the opportunity for reinsurers/insurers to move real and perceived risks in the capital market can help secure cyber insurance.”

The report is available via the S&P website.

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