ILS holds key to cyber cover solution – Lockton

Broker Lockton Re, has said now is the time for the creation of a speciality ILS cyber market as market conditions make the move a viable option to solve the gap between demand and supply of cover.

The broker has launched a new report – Unlocking Potential – Why now is the time Cyber Insurance-Linked Securities (ILS) has the momentum to succeed, in conjunction with CyberCube Analytics and Envelop Risk.

It said 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.

“Perils covered in ILS transactions have evolved significantly, from the peak natural catastrophes of hurricane and earthquake to broader natural perils including wildfire, winter storm, severe thunderstorms, and flood as well as non-natural perils including mortgages, mortality, and longevity,” the report explained. “The potential for cyber risk to be used as the basis for ILS investments was identified as early as 2015 in the insurance trade press, and the unfulfilled potential has been the topic of much debate since then.

“In this paper, the case is made that the time and the market is right for ILS investors to enter cyber insurance in a meaningful way. One by one, the issues which have held back the material development of the cyber ILS market are being addressed. As the cyber insurance market has matured, so the concerns of both (re) insurers and investors recede.”

Oliver Brew, lead author of the report and London Cyber Practice leader for Lockton Re, added: “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.”

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, explained “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.”

“There are compelling arguments that the time is right for investors to support cyber-ILS,” said 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.”

The report added: “The cyber insurance market has evolved significantly in the last few years. The understanding of the fast-changing nature of the peril has increased and there is much more dedicated cyber security expertise now embedded within the insurance industry. This has enabled a more sophisticated assessment of the threats, more effective communication with technical buyers, and an ability to provide growing level of comfort within senior management at carriers.

“This growth is expected to continue for years to come. The multi-faceted risk landscape is better understood, as is the role insurance plays, alongside technical and procedural controls to protect companies and build resilience against a myriad of risks, ranging from rogue employees, criminal hackers, and politically-motivated activists.

“Rates have increased in response to rising claims, so the value of the insurance has been demonstrated over many years. Entire new segments are beginning to show promise such as cyber products for personal lines. Longer-term, some other lines of business may be (partially) subsumed into cyber – for example auto insurance will need to consider the cyber threat to autonomous driving systems. Additionally, there are vast greenfield opportunities for potential buyers in new territories as well.”

Oliver concluded: “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.”