ILS investors remain cautious on cyber, but interest continues to rise: Lockton Re

Concerns over how a cyber catastrophe loss event could manifest mean many insurance-linked securities (ILS) investors remain cautious when it comes to considering allocating to cyber catastrophe bonds and reinsurance, but interest continues to rise and broker Lockton Re expects more efficient capital will flow to cyber risks in time.

Commenting on cyber reinsurance capacity and the growth in event focused cyber risk transfer arrangements, broker Lockton Re is positive the ongoing education will drive increasing ILS fund and investor engagement on cyber.

The broker said that, “There have been several new reinsurer entrants in H1 2024, with more capacity from both traditional reinsurers and third-party capital sources. Newer non-proportional Event Excess of Loss coverages have picked up interest among cedants, resulting in several event program transactions.

“Insurance Linked Securities (ILS) investors have notably increased their interest in the cyber market in the last few months, with the well documented cyber cat bond issuances of over $580m of new capital further growing supply.

“There is no one reason which can be attributed to this peak in interest in H1, but rather was seen as the result of continuous education from brokers to support investors.”

This education process has been critical in developing the cyber catastrophe bond and ILS market and it continues, as increasing numbers of investors get comfortable.

Evidence for this comes in our understanding from sources that since the first cyber catastrophe bonds were issued, they have traded increasingly widely in the secondary market, with a growing ILS investor base now comfortable with cyber cat bonds as part of their portfolios.

“With growing comfort of cyber risk as a profitable and sustainable class of insurance, more are committing the time to investigate it as a viable investment opportunity,” Lockton Re said.

Concerns remain though and may take time to evaporate sufficiently for cyber cat bonds to gain market-wide acceptance.

Lockton Re stated, “Many investors are still cautious, though the initial market making activity is driving engagement. As tail risk becomes better understood by investors, the perceived concern of how a cyber catastrophe could manifest diminishes.

“This in turn allows more efficient use of capital compared to traditional structures, with the aim of protecting specific areas of concern within portfolios.”

Continued development of cyber risk models is another factor that is helping to build confidence in the market, both on the traditional reinsurance and ILS sides.

Lockton Re said that, “Confidence and understanding of the outputs of cyber aggregation modelling continues to evolve, especially for ILS investors. Model vendors have released updated model versions complete with the most recent data and cyber catastrophe modelling tools. There is an understanding among all market participants that until more major cyber events occur, live claims data will be limited, and this is required for vendors to test and prove their assumptions, and ultimately recalibrate their models.”

All of which is helping to unlock more capital for cyber risks, both traditional reinsurance and ILS sources, which bodes well for the capital being there is more cedents look to the capital markets to sponsor cyber catastrophe bonds.

Read about every cyber cat bond transaction issued so far, including the first private cat bond deals and the more recent 144A cyber cat bond issuances, by filtering our Deal Directory by peril to view only cyber cat bond transactions.