Multi-model view of risk critical for cyber cat bond acceptance: SIFMA ILS

When the first full 144A cyber catastrophe bonds came to market at the end of last year, it was critically important for their success that sponsors provided more than one view of their risk and allowed investors to have a multi-model view, to increase comfort with the new peril, speakers at the SIFMA ILS conference in Miami said yesterday.

At the end of 2023, four 144A cyber catastrophe bonds were issued, bringing $415 million in risk to the cat bond market.

While the journey to full blown cat bonds for cyber risk has taken some years, one factor that was especially important was giving investors the ability to assess the deals through the lens of more than one risk model, speakers at SIFMA ILS said.

Charlotte Acton, Senior Director, Risk Advisory at Moody’s RMS, explained that they provided remodelled views of risk for some of the cyber cat bonds to potential investors in the deals.

“We think it’s critically important. With a brand new risk like this, we were so keen to set the standards from the beginning and to be able to give investors the ability to compare models on a like-for-like basis based on the same exposure data going in,” Acton explained.

Further stating, “That really allows people to get a handle on, what are the different modelling approaches, what is the impact, what do they need to think about, how do they take their own view. But you can’t do that if the models aren’t being run with the same comparable, detailed data set.”

Acton noted that cyber is not just new, it is also a highly complex risk, so, “Aggregate data was never going to capture the complexities of the different towers, the different layers that people are taking on individual accounts.

“So we thought it was critically important and it’s something that we’re committed to continuing to do, we want to continue to see that.”

Adding, “We’d love to see it across all perils, to be honest, I think there’s a real need.”

Joanna Syroka, Director of New Markets at cat bond focused investment manager Fermat Capital Management, LLC, said that from the investor side the step to offer the ability to analyse the first cyber cat bonds through differing views of risk was highly beneficial.

Syroka explained, “That was absolutely very valuable and very much appreciated by investors. It’s a rarity in the normal cat bond market to see that and, as Charlotte said, you make a lot of assumptions to remodel the deal based on that aggregate information. You have to guess which companies are being insured, what limits are being deployed, you can miss a lot of that nuance.

“You also miss a critical investor education opportunity. What I think is really fascinating about cyber modelling is we realised last year that generally people’s talking points on cyber modelling are like three to five years old and there’s been a significant amount of investment in the models since then.”

She went on to highlight that, “What’s fascinating is, RMS and for example, CyberCube and other modelling firm out there, they come at the cyber modelling problem from radically different philosophies, and the numbers are different, but they’re in the same ballpark and that is really interesting.

“It really shows you that the models have evolved, and are no longer little lab experiments. They are now in the mainstream and our market needs models to function, it’s a common language that we communicate to sponsors, to investors about where a deal should price.”

Further stating that, “The fundamental foundations of establishing that consensus view of risk is already there and I think it’s a testament of the deals that actually closed and cleared the market.”

Theo Norris, Head of Cyber ILS at Gallagher Securities and the panel moderator also said, “To that point, from the volume that did close, it looks like the market can handle two views of risk that are different effectively, there are differences in opinions and curves. It does seem that the market can handle that.”

To which Syroka responded, “Absolutely, we handle it all the time in the existing perils, when remodelled EL’s can be radically different, so we have to handle that.

“Investors are very happy to handle that uncertainty, but we’d love to have that information to process to begin with. I really do hope that this high standard remains in cyber and it’d be great to see it on some other deals in the market too.”

The final panel participant Dirk Schmelzer, Senior ILS Fund Manager at Plenum Investments added, “In cyber that’s even more important because it’s a new peril. So investors need to understand the approach of specific cedents and to make that approach and underwriting and claims management transparent and understandable to investors.

“It is something where the the first deal sponsors have done a good job and put a lot of emphasis on, really taking the time, educating investors about the peril.

“We appreciate it and I think that helped accelerate the understanding of the market and the acceptance.”