A new paper from the industry body provides analysis about the challenges facing the cyber re/insurance market, through traditional underwriting and alternative risk transfer.
The cyber re/insurance linked securities (ILS) market is still “in development”, rather than “on the verge of lift-off”, according to a new paper from the Geneva Association.
The paper, “Catalysing cyber risk transfer to capital markets: Catastrophe bonds and beyond”, is authored by Darren Pain, director for cyber and evolving liability at the Geneva Association.
Global cyber premiums increased sharply from less than $1.5bn in 2013 to around $15bn in 2023, noted the report from the membership body of re/insurance industry CEOs.
However, this still represents less than 1% of the total property and casualty insurance market, emphasised the Geneva Association,
Since the start of 2023 at least five different re/insurers have issued cyber ILS, including the first fully securitised cyber catastrophe bonds, the paper noted.
This marks “an important milestone” for the cyber insurance market, the paper suggested, although adding that the $800m of cyber cat bonds collectively represent less than 1.7% of the total cat bond market.
“A key issue therefore is whether market conditions are ripe for a significant and sustained upscaling in cyber risk transfer to capital markets, a crucial future step in distributing catastrophic cyber risks to those most willing and able to absorb them,” the report said.
“Intrinsic uncertainties about future catastrophic cyber losses ultimately limit the extent of cyber risk transfer, whether that be to re/insurers or financial market investors,” said the paper.
“But by spreading peak risks across multiple balance sheets, ongoing financial innovation can nonetheless better align capital against cyber exposures and thereby help progress towards more optimal risk sharing,” its executive summary added.
Several reasons were offered for why cyber ILS progress has been slow.
“The primary investor base in cyber is still narrow (although expanding) while limited secondary market trading means ILS as an asset class is relatively illiquid,” the report said.
Varied definitions of events that trigger insurance payouts “potentially undermine contract certainty”
These relate to the perils included, temporal limits, damages covered, and different language for policy exclusions, for example for war, critical infrastructure, the paper said.
“Investors remain cautious about the potential diversification benefits cyber risks offer their portfolios, given the potential for incidents to impact many companies simultaneously and reduce the prices of a wide array of financial assets,” the Geneva Association said.
On the plus side, the report said there are moves towards policy standardisation.
Added to this are improvements in formal modelling and quantification of cyber risks, and granular re/insurance coverages that better match investor risk preferences.
“Together they will boost confidence in the possible scale of transferred cyber losses and how they might covary with the returns on other financial assets,” the Geneva Association said.
Speaking in the paper’s introduction, Jad Ariss, managing director, Geneva Association, said the cyber market faces a “critical task” of aligning risk-absorbing capacity with the ever-increasing need for protection.
“Persistent hurdles, such as attracting sufficient capital and managing systemic uncertainties, continue to limit growth. Alternative risk transfer solutions, such as ILS – financial instruments that bundle insurance risks into investable assets – offer potential avenues for bridging this protection gap,” he said.
“The report explores the opportunities and challenges of scaling ILS for cyber, highlighting the intersections of insurance innovation and capital-market engagement. Drawing on insights from industry leaders and case studies, it finds that attracting a significant uplift in risk-absorbing capacity through ILS will require a range of initiatives, including policy standardisation, improved risk modelling, and enhanced ILS market liquidity,” Ariss added.
Here is the link to read the full paper.
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