Cumulus Re cat bond a new avenue to cyber ILS: Henning Ludolphs, Hannover Re

The arrival of the world’s first cloud outage catastrophe bond was viewed very positively, and provides investors with a new avenue into the cyber insurance-linked securities (ILS) space, according to Henning Ludolphs, Managing Director Retrocession and Capital Markets at Hannover Re.

Earlier today, large reinsurer Hannover Re and Parametrix, a cloud monitoring, modelling, and insurance services company, unveiled Cumulus Re (Series 2024-1), a $13.75 million privately placed cat bond which provides Hannover Re with retrocession protection against cloud outage loss accumulation.

Around the launch of this innovative transaction, Artemis spoke with Hannover Re’s Ludolphs and Sharon Haran, Chief Commercial Officer at Parametrix, about the cat bond lite transaction, its role within Hannover Re’s cyber reinsurance portfolio, investor sentiment, and more.

Generally, explained Ludolphs, the deal was viewed very positively by the investor base because it’s parametric.

“It’s a new avenue to ILS cyber,” he said. “It’s very clear to understand when a loss has happened or not, you don’t have discussions about occurrence definitions and things like that.”

“On the other side, it’s a new model that hasn’t been tested and hasn’t been calibrated. Although, this is not surprising as if you think back to around 1990 when they had the first Florida hurricane models, it’s the same thing. Which of course, brings in, I wouldn’t say concerns, but some hesitation,” he continued.

For Parametrix, it was a journey bringing this deal to market, and Haran explained that after more than a year of discussions, one thing he’s noticed is a significant change in investor maturity.

“With more transactions coming to the market, I think they started to gain more confidence with the risk, but also asking and getting more sophisticated in their understanding of the risk and the measures.

“So, I think that currently the sentiment is totally different than when we raised this idea almost two years ago. When we tested the water at that time, it was totally immature, but today, both the level of understanding and willingness to take this risk is totally different than it used to be,” said Haran.

While the cyber ILS activity witnessed last year undoubtedly aided investor understanding and comfort with cyber risk, Haran, like Ludolphs, noted the importance of the deal being parametric, which adds both value and differentiation.

“We are relatively new into the ILS world, but we learned through this process that the investors have a strong preference for parametric transactions, which gives the clarity and has no collateral trap. And in our case, since it’s a technology with a very clear yes or no as to whether there was an outage, it’s yes or no whether there was a loss. These are some factors that most of the investors appreciated a lot,” he said.

Cumulus Re protects Hannover Re’s large cyber reinsurance portfolio against loss accumulation as a result of cloud outage, which is the peak risk in the reinsurer’s cyber portfolio.

In terms of how this form of retro sits alongside Hannover Re’s other sources of cyber retro, Ludolphs described it as an additional element.

“It’s still very small and in view of the size of Hannover Re and our cyber portfolio, it does not really move the risk management a lot at this stage. The size is $13.7 5 million and the strategy was more to get started, which makes it easier over time to expand it, or get investors comfortable with it, rather than getting involved with a huge amount. And having in mind that this is the first one, it would be even more difficult to get large numbers together. So, we are perfectly satisfied with this little start,” said Ludolphs.

Adding, “And in terms of Hannover Re, cloud outage is the peak risk in our cyber portfolio. And even if we don’t have losses, it ties up capital because we need to put capital behind it. And with such a transaction, it helps us on the capital management. Again, this first deal is so small it doesn’t really make a big difference, but you always start small and get bigger.”

Parametrix was formed to build a framework that will enable transfer of cloud outage risk, and Haran explained to Artemis that over time, the firm realised that the issue of cloud outage to a US corporate is not significantly different from the risk of an insurer or a reinsurer.

After all, all of them are exposed to the same cloud outage of either AWS, Google Cloud Platform, or Microsoft Azure.

“The problem, for example, for insurers or reinsurers like Hannover Re, is quite significant and as Henning said, this is the major risk for them within their cyber portfolio. So, we said, okay, why wouldn’t we apply the technology that we have developed, the pricing mechanism, the monitoring approach, and duplicate it to this market need. For us it’s quite a seamless process,” said Haran.

To end, both Ludolphs and Haran reiterated the importance of creating a new avenue for investors into the expanding cyber ILS world.

“From the general ILS investor view, there are now more routes into cyber. There is a quota share which we as Hannover Re did with Stone Ridge, there are the Beazley cyber transactions, which are ultimate net loss based, there are the ILW transactions with Swiss Re, and there is also AXIS. And this is now a new avenue, a parametric one which allows the investors even a larger range of choices, which is I think good for the market,” said Ludolphs.

“In the long term, it will be important for the insurers of course to get more reinsurance capacity, for the reinsurers to get more capital market capacity, and the more routes we have, the better it is for the market,” he continued.

“What we heard, especially from investors, is that it’s a new path, but it’s also further diversification for their existing portfolio. Cloud outage is not correlated to earthquake, is not correlated to weather. So, it’s a new risk, totally uncorrelated, and this is something that adds diversification into their portfolios,” said Haran.

This Cumulus Re cyber catastrophe bond is now the eighth cyber cat bond arrangement listed in our Deal Directory, but the first to feature a parametric trigger.

You can read all about this Cumulus Re (Series 2024-1) private cloud outage cyber catastrophe bond in our Deal Directory.