Continued, gradual growth expected in cyber ILS market: Darren Pain, Geneva Association

During the Geneva Association’s media call on Global Risks & Insurance, Darren Pain, Director of Cyber, highlighted his expectation for continued growth in the cyber insurance-linked securities (ILS) market, though he noted this growth is likely to be gradual due to ongoing challenges.

The cyber ILS market has developed rapidly, with 2023 marking a pivotal year for the cyber re/insurance space. After years of debate and effort, cyber risk finally made its debut in the capital markets.

“A nascent market for cyber ILS is emerging. In 2023, five catastrophe bonds were issued, but if you think about other types of ILS, other instruments have also been developed,” said Pain.

Beazley was the first to act, with three privately placed cyber ILS deals in 2023. Then, in the fourth quarter, Beazley, AXIS Capital, Swiss Re, and Chubb all sponsored full 144A cyber cat bonds.

This momentum continued into 2024, which has seen three cat bonds issued to date. Of these, two are the largest on record: Beazley’s PoleStar Re Ltd. (Series 2024-2), issued in May 2024, and PoleStar Re Ltd. (Series 2024-3), issued in September 2024, providing $160 million and $210 million of reinsurance, respectively.

Adding to this, Hannover Re unveiled Cumulus Re (Series 2024-1) in April 2024, the world’s first cloud outage catastrophe bond, providing investors with a new avenue into the cyber ILS space.

Despite these advancements, Pain cautioned, “I think the punchline from our analysis is that while the recent cyber cat bonds are a welcomed development and we anticipate continued growth in that market, there are still some headwinds that have to be overcome to facilitate a deeper and broader transfer of cyber risk to capital markets.”

Pain pointed out that a key challenge with cyber ILS compared to other ILS instruments is the perception—due to the lack of a rich history of major cyber incidents—that cyber risks involve more systematic elements.

“For which I mean, if you have a cyber incident, it might coincide with adverse developments in other financial markets. So, if a cyberattack hits a company, it could potentially impact their earnings or solvency position,” he explained.

Pain continued, “In that case, you may well have some impact on equity markets or corporate bonds. As a result, it remains unclear how far adding cyber to a portfolio would be beneficial to an investor in terms of reducing overall risk. That’s different than the nat cat world, where natural catastrophe perils typically don’t coincide with major falls in financial markets, and the potential portfolio diversification benefits are much more straightforward.”

He concluded, “So, that is a challenge at the moment. We continue to expect that ILS will develop further for cyber but it is likely to be gradual. And that would actually echo what we initially saw with other instruments for transferring risk to the capital markets, including the nat cat.”

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