Cyber cat bond a welcome tool for balance-sheet protection: Miller, DAC Beachcroft

The recently launched cyber catastrophe bond from specialist insurer and reinsurer, Beazley, is a welcome innovation and an important addition to insurer’s “armoury against systemic risk,” according to Julian Miller, a London-based Partner at law firm DAC Beachcroft.

In early January, London headquartered Beazley announced the launch of the market’s first cyber cat bond; a $45 million transaction which provides the firm with indemnity reinsurance protection against all perils in excess of a $300 million cyber catastrophe event.

The cyber insurance market has been expanding rapidly for some time, and with the rate of growth expected to persist and even accelerate, the need for reinsurance, both traditional and alternative sources, is essential as the marketplace evolves.

In recent times, it’s been reported that cyber insurance market growth has slowed somewhat amid a reluctance from some reinsurers to assume the exposure, driven in part by a lack of understanding around the risk and its tail, with some noting that the models are not yet as advanced as they could be, while industry loss data remains scarce when compared with nat cat perils.

It’s hoped that the first cyber cat bond, of which additional tranches are anticipated in the months ahead, will be a catalyst to reverse this trend, and ultimately pave the way for greater reinsurance and capital markets participation in the cyber catastrophe space.

“One reason for welcoming this facility is the increasing focus that insurers generally will be required to manage exposure to systemic risk,” said DAC Beachcroft’s Miller when commenting on the deal and what it means for the cyber risk transfer sector.

“While insurers have always faced systemic risks, the evolving nature and increased scale of such risks is attracting increasing scrutiny. Cyber risk is plainly a systemic risk, in respect of which there is significant transfer to insurers.”

Given the systemic nature of cyber, as well as concern around the risk from entities such as the PRA, Miller stressed that the bond is a “welcome innovation which has been positively received by the market”.

“The cyber cat bond is thus a welcome tool in protecting an insurer’s balance sheet, to be deployed alongside other risk mitigation techniques such as more traditional forms of reinsurance,” he continued. “A further reason to welcome this development is that it will help underpin ambitions for growth in cyber underwriting.”

Commenting on the unusual growth rate that is anticipated with cyber, Miller noted that carriers will need to “take in their stride” difficult underwriting years as well as the good times.

“The additional scrutiny of a carrier’s underwriting required to make the risk transfer attractive to ILS investors will carry with it both a burden and a benefit, but again we contend that overall, this is to be welcomed,” said Miller.