Improved clarity on systemic risks can encourage more cyber ILS capacity: AM Best

While cyber insurance pricing seems to have levelled off in 2023, rating agency AM Best noted that more can be done to attract capital to the segment, including through the provision of greater clarity on cyber risks that are considered systemic.

AM Best believes that by increasing the clarity surrounding systemic cyber risks, more alternative capital from third-party investors can also be attracted to help in providing more reinsurance and retrocession capacity.

The knock-on effect from that would be a more stable primary cyber insurance market, with carriers feeling increasingly confident to grow their cyber risk portfolios, safe in the knowledge they have hedging capacity available to help them manage aggregation risks better.

The appetite and take-up rate for cyber insurance has proved stable and growing, “making cyber insurance one of the fastest growing lines of business in the P/C industry the past eight years, outpacing the overall industry since the NAIC began collecting data on the line in 2015,” AM Best explained.

However, “Cyber premiums account for a mere 0.8% of premiums written by P/C insurers but the line has grown exponentially since the pandemic because of the widespread increase in employees’ working from home,” the rating agency noted.

Adding, “Cyber is still viewed as having the greatest potential for growth in the P/C industry, with direct premiums written (DPW) estimated to reach $15 billion by 2025. But with this growth comes a great deal of risk and uncertainty.”

It’s how to deal with this uncertainty and to explain it to capital providers, both traditional reinsurance or retro and insurance-linked securities (ILS) investors, that has turned out to be a key piece of the puzzle for fostering growth of cyber insurance coverage.

Loss frequency and severity have been on the rise in cyber risk underwriting, but it’s still the questions of systemic exposure, war and other event definitions that have proved critical to growing this marketplace and the capacity needed to back it.

AM Best said, “Catastrophe bonds have been part of the overall reinsurance market for some time, bringing additional capacity to cover extreme events. The first cyber catastrophe bonds came to the market in 2023, a sign that investors are willing to support the risks because of improved modeling.

“Three private bonds and four public bonds were issued in 2023, and issuance momentum is growing. Swiss Re even brought forth the first industry loss warranty (ILW) catastrophe bond providing $50M of retrocession protection.”

Looking ahead to how this burgeoning cyber ILS market can expand further, AM Best noted its down to giving investors more clarity.

“Improved clarity with regard to systemic risks, such as war and state-sponsored attacks, will likely bring with it more ILS (insurance-linked securities) capacity to the cyber market, which is greatly needed to support the growth of cyber risk exposures,” the rating agency explained.

As we reported, executives at cyber cat bond sponsor Beazley explained the importance of exactly this, in reporting their firm’s results.

We’ve also seen Beazley sponsor its second 144A cyber catastrophe bond in recent weeks.

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