Transfer of cyber risk to ILS investors crucial to unlocking growth: Twelve Capital webinar


Demand for cyber insurance and reinsurance is expected to continue to grow in the years ahead, but with carriers seemingly at the maximum of what they can assume, transferring some of the risk to the capital markets will be crucial to achieve exponential growth, according to industry experts.

This afternoon, Zurich-headquartered insurance-linked securities (ILS), catastrophe bond and reinsurance investment manager, Twelve Capital, hosted a webinar on cyber ILS, moderated by Marcel Grandi, the company’s Head of ILS Sourcing.

Speakers included: Max Muehlbeyer, Senior Underwriter, Retrocession & Capital Markets, Hannover Re; Theo Norris, Head of Cyber ILS, Gallagher Re / Gallagher Securities; and Rhodri Morris, Head of ILS Analytics, Twelve Capital.

After an overview of cyber as a risk and the growth in cyber insurance and reinsurance premiums, speakers discussed the role of ILS in the evolving and expanding cyber risk space.

“It was mentioned before that there will be significant demand for cyber insurance in the future, and the capacity that’s currently available in the reinsurance market, on a standalone basis, will in all likelihood not suffice for taking up that cyber risk,” said Muehlbeyer.

“So, transferring that risk or parts of that risk to the retro market, or to ILS investors, is crucial to unlocking that growth in the industry,” he added.

Muehlbeyer went on to explain that while this can be done on a traditional basis, what’s really interesting is how to do that via an ILS transaction, and that generally, there’s a couple of ways to do that.

“So, either you would go down a proportional route by, let’s say, setting up a quota share with a trusted partner, or you could do that on a non-proportional basis. And of course, they can be in various ways. They can be on indemnity basis, or they could be, for example, on a parametric basis. And that would allow, for example, to also carve out certain pieces of this whole bucket of perils that are included in cyber to, let’s say, just focus on one peril and make this more understandable,” said Muehlbeyer.

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Norris of Gallagher Securities, part of the global broker, agreed with Muehlbeyer, and also highlighted the importance of education around cyber risk.

“Educating on how cyber works, how systemic it is, how the model outputs work, creates an appetite in an investor,” he said.

Norris stressed that whether it’s an attritional play to support each and every loss and some of the longer tail, third-party losses, or to cover against a remote cyber catastrophe event, or even to cover the total industry loss from an event, as well as on a parametric basis, there’s a product that would respond.

“So, effectively, whatever the cyber appetite, once investors are educated, comfortable and want to take the peril, there is a product for you with us as broker, but other brokers, with Hannover Re and many other players.

“So, that’s what’s exciting about cyber and why certain investors have got excited because there is a product for them. They just need to decide what sort of cyber sub-peril or strategy they want to take,” he explained.

Morris emphasised that in general, the capital markets and ILS are in a great position when it comes to cyber.

“As Theo and Max have said, the insurance and reinsurance companies are almost at their maximum of what they can take. There’s a huge growing demand of people and businesses wanting more insurance and at the point of now, it’s got nowhere to go. And so, on an analogous to sort of natural catastrophe and the benefits that cat bonds or collateralized excess-of-loss gives to natural catastrophe, we’re at the start of that for cyber.

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“ILS and capital markets are in a great position to, through education, understand what options are out there, what do we want it to look like and then offer that sort of capital relief to insurers and reinsurers in order to grow the market,” said Morris.

He concluded that for the cyber re/insurance market to achieve exponential growth, “We need capital markets and ILS to get involved.”

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