Cyber capital

Are we witnessing a new era for cyber risk?

The start of the new year has brought with it many unwelcome developments, including the continuing war in Ukraine, Arctic blasts in Europe and North America, and continuing economic uncertainty as both supply chain difficulties and the spectre of inflation continue to weigh heavily on national economies. 

In the world of emerging risks, however, it has brought some interesting news with regard to cyber cover, and we are not – for once – talking about yet more ransomware demands. No, this time the market has stood up and taken notice because the long-awaited convergence of cyber risk with the capital markets is starting to take place (something we have been predicting for some time, by the way).

Hannover’s retrocession

This week, Hannover Re unveiled the development of an additional retrocession tool that – it claims – for the first time enables the capital markets to participate directly in coverage of its cyber risks through a quota share cession. Longstanding partner Stone Ridge is supporting the transfer with capital of $100 million.

“For the first time, we were able to transfer cyber risks to the capital markets, and on a substantial scale, through a proportional reinsurance solution. This underscores our lead role as a bridge builder between the capital markets and the insurance industry,” says Silke Sehm, whose scope of responsibility as a member of Hannover Re’s Executive Board includes retrocession and insurance-linked securities (ILS). 

“We want to build on this initial success and further expand our cooperation with capital markets investors, extending also beyond our own retrocessions.”

Reconciling complexity

In designing this transaction, Hannover Re was said that for the first time it was able to reconcile the complexity of a proportional cyber risk cession with the needs of a capital markets investor. 

Essentially, the transaction covers cyber risks in Hannover Re’s worldwide portfolio and has a long-term orientation, and is part of the carrier’s protection strategy outside the company’s traditional retrocession programme for catastrophe risks. Among other things, it points out, Hannover Re has brought an extreme mortality cover for the Life & Health reinsurance business group to the capital markets in regular tranches since as long ago as 2013.

“Stone Ridge investors value our approach to sharing the proportional business of select, leading reinsurers, as we now add cyber risk to our more than $60 billion notional limit deployed since our inception in 2012,” Ross Stevens, CEO of Stone Ridge, adds. 

“Cyber reinsurance represents a natural addition, and diversifying complement, to our other alternative investment franchises, as investors increasingly turn to Stone Ridge for investment outcomes superior to stocks and bonds. The market for cyber risk transfer is attractive given our expectation of high average returns and low correlation. With this transaction, we are thrilled to expand our treasured partnership with Hannover Re, extending our trading relationship beyond catastrophe and life risks, and we are just getting started. We intend to meaningfully grow our cyber exposure throughout 2023 and beyond.”

This looks likely to be only the first step, according to Henning Ludolphs, managing director for Retrocession and Capital Markets at Hannover Re, who points out that the company sees “further considerable potential for the transfer of cyber risks to the capital markets using the entire ILS toolkit… given the strong demand, our clients rightly expect us to make adequate cyber capacity available to them.”

Beazley first

However, what really caught our eye this month was cyber insurance leader Beazleys’ launch of the market’s first cyber catastrophe bond on 9 January, the first time that a liquid Insurance-Linked Securities (ILS) instrument has been created for cyber catastrophe risks. 

Such a development is a welcome one, for a Beazley itself points out, developing effective solutions for catastrophe risk is vital to allow the supply of capacity to the cyber (re)insurance market to increase, to meet growing demand for cover from business and society.

According to Beazley, the $45 million private Section 4(2) bond is fully tradeable under Rule 144A resale and provides indemnity against all perils in excess of a $300 million catastrophe event, with the potential for additional tranches to be released through 2023 and beyond. The bond is backed by a panel of ILS investors including Fermat Capital Management, LLC, and was structured and placed by Gallagher Securities, the ILS arm of Gallagher Re.

Systemic cover

Interestingly, the bond is designed to cover remote probability catastrophic and systemic events. As Adrian Cox, CEO Beazley, says: “I’m proud that the high-quality of Beazley’s cyber underwriting has been recognised by investors in the placement of the market’s first cyber catastrophe bond. As a leader in this market, we are at the forefront of delivering new solutions that are allowing the cyber insurance market to grow to the size that clients need.”

John Seo, co-founder and managing director at Fermat Capital Management adds “As an ILS investor, we have been monitoring the cyber insurance market for several years waiting for the appropriate opportunity to invest. This well-structured bond together with Beazley’s strong cyber underwriting have provided the basis for us to do so. We believe this deal marks an important step in unlocking capital market investment into cyber risk and creates a solid foundation for a future cyber ILS market.”

Rising demand

Tom Wakefield, UK CEO, Gallagher Re, comments: “Helping to bring new and alternative capacity into the global cyber (re)insurance market to keep pace with rapidly rising demand for risk transfer has been a primary focus of the Gallagher Re cyber team. Beazley’s cyber expertise and proactive engagement with capital markets has proven them to be an instrumental partner in placing this first cyber catastrophe bond on their behalf. The calibre of ILS investors involved, and complexity of the class, demanded an underwriting business of high quality to ensure a successful outcome. Where carriers can demonstrate a similar approach, the opportunity exists for a strong and sustainable cyber catastrophe ILS market.

“I’m proud that the high-quality of Beazley’s cyber underwriting has been recognised by investors in the placement of the market’s first cyber catastrophe bond. As a leader in this market, we are at the forefront of delivering new solutions that are allowing the cyber insurance market to grow to the size that clients need.”

Adrian Cox, Beazley