Securitisation can help ease the capacity constraints of the current hard market

In a new report on cyber re/insurance, Lockton Re argues that now is the time cyber Insurance-Linked Securities (ILS) has the momentum to succeed.

The cyber insurance market continues to mature and grow dramatically. At the same time there has been growing model maturity, as data and understanding of the peril have all developed in recent years.

In January, Beazley launched the market’s first cyber catastrophe bond. The $45m private Section 4(2) bond gives the insurer indemnity against all perils in excess of a $300m catastrophe event, with the potential for additional tranches to be released through 2023 and beyond. 

It is backed by a panel of ILS investors including Fermat Capital Management, and was structured and placed by Gallagher Securities. CyberCube offered its modelling expertise.

Oliver Brew, lead author of the report and London Cyber Practice leader for Lockton Re, commented, “The mechanisms and methodology behind cyber modelling are becoming better understood, and the strength of the data and frameworks being utilised is increasing all the time, meaning the potential for cyber ILS investments can be leveraged to play a critical role in unlocking capacity required to continue developing the wider cyber insurance market.”

Investors ’becoming more comfortable’ with cyber risk

There has also been a more positive view of cyber risk by ILS investors.

Brittany Baker, CyberCube vice president of Solution Consulting and co-author of the report, commented, “ILS investors are becoming more comfortable with cyber risk, but further education is needed on how cyber models work.

”Market-leading participants are increasingly demanding enhanced exposure management reporting that allows for more in-depth business intelligence reporting and more sophisticated strategic decision-making.”

Lockton Re is working with CyberCube Analytics and Envelop Risk to create a market wide perspective

“There are compelling arguments that the time is right for investors to support cyber ILS,” commented David Ross, executive vice president of ILS & Capital at Envelop Risk.

”The class is in a secular hard market driven by increasing digitisation and growing insurance penetration. Those with access to data and a modelling advantage can build well-diversified and profitable portfolios to meet investor risk-return preferences.

”Structures exist to manage capital efficiently without dilution of returns from excessive collateral trapping.” 

Oliver concludes, “This report supports the massive opportunities which arise from the continued demand for cyber (re)insurance which will only be further enhanced by the successful execution of cyber ILS transactions.”