Cyber ILS market at ~$500m in size is “at the start of the journey” – Envelop’s David Ross

Speaking in Bermuda at the annual Convergence event last week, David Ross of data-driven cyber underwriting company Envelop Risk, explained that the cyber insurance-linked securities (ILS) market has a long-way to grow, given the size of the opportunity and the need for cyber risk capital.

Ross is the Executive Vice President of ILS & Capital at Envelop Risk and he discussed the current landscape in cyber insurance and reinsurance, saying there’s a “huge opportunity” and that “the growth runway ahead of us is quite remarkable.”

He discussed what has been achieved so far in the cyber ILS space, citing the Beazley private cyber catastrophe bonds, as well as arrangements such as Hannover Re’s private quota share with asset manager Stone Ridge.

“There’s already a lot being done in this space, I hesitate to put a number on it, but I would say certainly at $500 million of capacity annually supporting this space and we’re right at the start of the journey, that’s the exciting thing,” Ross told the Convergence audience.

He explained that the growth in cyber insurance and reinsurance sees carriers “beginning to get full of this risk, it’s becoming a peak peril.”

“That begs the question, you know, we need a release valve and the capital markets could provide that to take the stresses off the balance-sheets of the insurers, and the reinsurers and step in and just support the overall growth of the market,” he said.

Adding, “There are some parallels here from what we see in cyber versus property cat in the early days, where we had real rationale there to say well, we need we need these deep pools of capital from the capital markets to step in and support the overall growth of the market. Cyber is going through that phase right now and hence, that’s why it’s a huge opportunity.”

He discussed the first private cyber cat bonds from Beazley, saying, “somebody has to be first and we thank Beazley for doing that.”

Going on to say, “We’ll see a progression from here. We’re already aware of more sponsors, prospective sponsors, working on bonds, bringing them to market.

“I don’t think we’ll have to wait very long until we see the first 144a issuance which will come with an added liquidity for secondary trading. So that’s a positive development.”

He then commented as to why the growth of cyber ILS might be considered to be slow, saying, “We’ve already put to bed the question, can cyber risk even be securitized. So the question then becomes, why aren’t we seeing more of it? I think that’s just a simple function of investors being sceptical or having concerns that haven’t yet been address. It’s an education process, right? No one’s going to jump in with both feet into a brand new line of business that we don’t understand.”

At Envelop Risk, Ross and others are constantly working to educate potential investors and capital providers on cyber risk, the maturity of cyber underwriting and cyber models, saying that his company are speaking with everyone, from pensions, to hedge funds and also private equity investors.

“I think that sort of investor set is more likely to show interest here, but we’re obviously having conversations with all of them to see how that how that evolves,” Ross said. “We’re also speaking with ILS fund managers, as a window on to their investors.”

On specialist insurance-linked securities (ILS) fund managers, Ross said there is already plenty of activity from those looking to get acquainted with cyber risk.

“There are already, by my reckoning, around 10 ILS fund managers actively writing cyber today. Pretty small scale right now, most of them kind of dipping their toe around the edges. It’s not meaningful investment. I think many of them want to do more. The vast majority have at least done research in the space, which I think is great,” Ross said.

Going on to explain, “That’s not to say they couldn’t partner with another underwriting firm that does have that expertise. The underwriting firm could do what they do best, which is to originate the business and underwrite it correctly and then you could lean on the ILS fund manager to provide some of the middle office and back office functions, where the cyber underwriters may not have that capability.

“So, I think there’s the scope there for partnerships to help move this forward, we’re certainly having those conversations as well. So I see all of this coming down the pipe.”

Also read:

– Many ways to generate ILS alpha, but managing expectations key: Convergence panel.

– AI + computing power = exciting developments for ILS: Adrian Jones at Convergence.

– Responsible investors still require a minimum return: Convergence 2023.

– Significant investor interest. A wall of money, but slower moving: John Seo at Convergence.

– ILS market size matters. We need to make it scalable: Convergence panel.

– The “most pronounced” risk-adjusted ILS returns: Tangency’s Stanton at Convergence.

– Bermuda remains world-leader for cat bonds, ILS and Convergence.