Cyber ILS investor base could become more tech-led in time: Gallagher Re

As the capital markets, insurance-linked securities (ILS) specialist managers and institutional investors get more familiar and comfortable with investing in cyber insurance risk, there is a chance we see a new breed of more tech-led investors emerge and become a core of the cyber ILS asset class, Gallagher Re believes.

The reinsurance broker notes that the capital markets are likely to be a growing source of complementary cyber reinsurance capacity and that there are increasing routes available for cyber insurers and reinsurers to access the capital markets.

“Capital markets are likely to play their part in cyber (re)insurance over time,” Gallagher Re said. However, “There has been only modest growth in this area, due to a number of challenges.”

These range from the maturity of cyber risk models, to the inconsistent performance of cyber insurance as a class of business, as well as a lack of investor understanding, the perception that cyber can only be a correlated risk and the fact it is viewed as challenging to diversify within cyber risk itself.

But there are positive steps being taken to develop this new segment of the ILS market, with some headline deals helping to broaden awareness and increase investor appetite.

These range from quota share arrangements and sidecar like structures, to the issuance of cyber catastrophe bonds (like the two Beazley deals Cairney and Cairney II).

But, there remains a lot of work to do in getting investors comfortable with cyber risk to encourage the capital required to back this burgeoning insurance class.

Gallagher Re explains, “The common thread that runs through successful capital-raise efforts in the cyber (re)insurance market is education around the ever-evolving characteristics of the peril; the (re)insurance structure can follow.

“The level of data granularity and transparency required to draw capital markets to cyber (re)insurance is material, and the journey may be longer than for property trades.

“However, the sponsor benefits from obtaining brand-new capacity.”

Investors are taking a measured approach with cyber risk, spending considerable time trying to understand what it means to add this to existing ILS portfolios, or to create new portfolios to house cyber and other diverse insurance risks.

Explaining how it sees the cyber ILS investor landscape developing, reinsurance broker Gallagher Re said, “Investors are taking their time to understand and study prospective cyber cedants – and perhaps look to support fewer of them in a more significant way than in property catastrophe – with the intent to “turn on the tap” of capacity with their selected partners as the “proof of concept” develops.”

But adding that, “There is evidence of a number of major property ILS investors transitioning into cyber.”

But the reinsurance broker expects the investor base will continue to develop and perhaps cyber is one area where additional expertise in the technology arena may be useful

“Over time, we may even see a completely new breed of investors (perhaps more tech-led) make up the core of the cyber (re)insurance investor base,” Gallagher Re said.

Adding that, “The cyber cat bond market is now up and running, institutional investment houses are partnering with cyber MGAs through quota share arrangements, and technology-led investors are in discussions with brokers around the prospect of investing and supporting the market.

“Capital markets have also begun entering the cyber (re)insurance market in a bigger way, and are likely to become a key ingredient of a healthier and sustainable (re)insurance market.