A New Type of ILS Investment – Cyber Insurance CAT Bonds

Update: LL Surplus Lines Series (Entry 35): Surplus Lines Working Group Exposes Changes to IID Plan of Operation for Alien Insurers

Specialty insurer Beazley sponsored the first Cyber Insurance Catastrophe (CAT) bond recently, a new type of ILS or insurance linked security issued by a Bermuda entity. They announced the $45 million private placement on January 9, 2023. The bonds provide investors with a generous floating rate of interest and a return of principal in one year, provided that no single catastrophic event occurs across Beazley’s portfolio of cyber insurance policies that results in more than $300 million of losses. Any losses above $300 million incurred by Beazley on those policies as a result of that one event would be absorbed by the investors, up to the $45 million principal amount. The deal was marketed under an NDA, so not all of the details are available, but the bonds will not protect against losses from a state-sponsored cyberattack, which is typically excluded from cyber insurance policies as an act of war.

While CAT bonds have been around for years, they typically cover natural disasters like hurricanes, earthquakes and wildfires and allow the capital markets to provide additional capital to the insurance industry. Cyber insurance has been growing rapidly as a product class and being able to use CAT bonds to provide additional capital makes sense. It is particularly helpful because of the recent dislocation in the reinsurance markets and because current pricing trends in cyber insurance may present good investment opportunities.

In spite of the current difficulties in the overall industry with raising capital for insurance and reinsurance, Beazley was able to introduce a new asset class into the CAT bond market, with Fermat Capital Management as a lead investor and with Gallagher Securities acting as the structuring and placement agent.

CAT bond issuance has tended to range between $10-12 billion per year, with many new sponsors seen to be entering the market in 2023. If you have questions, please contact your Locke Lord relationship partner or the authors.