Advisen FPN

Advisen Cyber FPN - Thursday, August 11, 2022

Cyber ILS a 'work in progress' but interest is there: PCS research


Cyber ILS a 'work in progress' but interest is there: PCS research

By Erin Ayers, Advisen

With rising cyber prices and demand, more insurance-linked securities (ILS) investors may be more interested in putting their capital to work in the market than ever before, according to research from Verisk’s Property Claim Services (PCS).

“The ILS market originally formed as a way to bring fresh capital to the property-catastrophe when demand was acute and capital was in short supply … and similar characteristics appear to be present for cyber, if not to the extent witnessed for property-catastrophe after Hurricane Andrew 30 years ago,” said the authors of a new article published in the Journal of Risk Management and Insurance.

For the research, Tom Johansmeyer and Alex Mican of PCS surveyed 24 of the world’s most prominent ILS fund managers. One quarter of the respondents have already dabbled in cyber re/insurance transactions and others expressed interest and plan to begin trading in cyber this year, the results revealed.

However, the cyber re/insurance market needs to engage more with ILS funds to boost their comfort levels with the risk.

“For years, the global re/insurance industry have either lamented the inability to access insurance-linked securities’ (ILS) capacity for cyber risks or simply declared that ILS should become available to help with no reason other than the traditional market’s need for capital,” wrote Johansmeyer and Mican.

Better alignment between the cyber insurance sector and the ILS market “could be an important first step toward turning the occasional transaction into a repeatable and scalable market that can provide robust and reliable support” for the global cyber market.

In the last few years, the cyber reinsurance market has grown to $2.8 billion with the four largest firms covering $2.1 billion of it and the next three accounting for $350 million.

“The cyber reinsurance sector has grown with remarkable speed over the past five years, even if that pace has ground to a near halt recently,” wrote the authors.

Demand has continued to rise for cyber reinsurance as capacity had dwindled, and new capital is essential to growing the market, according to the article. Reinsurers also face difficulty with retrocession capacity, a key area where the ILS market could help.

However, in recent years, “a mix of frustration and disinformation” has widened the gap between the ILS market and the cyber sector. Some of the obstacles include misconceptions around the ILS market and an expectation that investors should want to deploy their capital irrespective of the risk.

For ILS fund managers, reticence to jump into cyber usually centers around price, lack of modeling maturity, and deal structure. Many ILS investors prefer to stick with the attractive rates on line (ROL) for property-catastrophe risks.

“Cyber pricing likely would have to increase not just from what had been quoted in the past; it would also have to compete with the higher property-catastrophe ROLs that come with a hardening market,” the authors noted.

Just two respondents to the PCS survey have restrictions on trading in cyber – while one fund had no interest in the class, the other said it was open to exploring it with their investors.

According to the survey, 18 respondents have analyzed the cyber market, while five respondents have already completed cyber deals in the past. Eight respondents plan to trade in cyber this year, as long as the deal terms make sense for their funds.

Several funds indicated interest in taking on cyber risk via catastrophe bond rather than collateralized reinsurance or industry loss warranties (ILW).

PCS estimated the cyber ILS deals over the last five years to approach $500 million in value. Some of the trades completed in the past have been renewed several times and become strategic relationships, PCS shared.

“What is most evident from the responses offered by more than 75% of the global ILS community is that cyber ILS is still very much a work in progress. The responses suggest that the sector generally wants to consume cyber re/insurance risk and is looking for ways to do so,” said the authors.

Managing Editor Erin Ayers can be reached at