ILS markets could cover cloud outage risk

MGA Parametric, the specialist provider of cloud downtime insurance, said it is working to bring to marketInsurance-Linked Securities (ILS) transactions for this growing area of risk.

The product which would protect ceding (re)insurers against a major sustained outage of the cloud, to which many (re)insurers are exposed through their cyber portfolios.

According to Parametrix, a ‘Cloud-in-a-Box’ transaction would employ a concrete, predetermined, and easily observed parametric trigger to transfer the outage of specific cloud service or groups of services (such as storage) provided by a specific vendor (such as Amazon Web Services) in a pre-defined cloud service region.

“Significant accumulation of cloud outage risk is already on the books of many insurers and reinsurers. cyber insurance would become a much more attractive class of business if this potentially catastrophic accumulation risk were better managed,” said Yonatan Hatzor, co-founder and CEO of Parametrix. “We can do that through ILS structures.”

Dr Rom Aviv of RHA Advisory, a senior advisor to Parametrix, added: “The structure will follow either the cloud downtime exposures within cedants’ underlying portfolios, or will refer to a peak-risk region which could lead to a significant loss. Correlation between cloud outages and the broader economy is low, so cloud downtime risk is potentially diversifying for investors. It features a well-defined trigger mechanism, short-tail, and a very limited risk of trapped capital or loss inflation.”

The global cloud computing market, defined by the amount spent on public cloud-based services, was an estimated $545.8 billion in 2022, according to one study, which projects growth to $1,240.9 billion by 2027.

According to another, more than 90% of organisations use the cloud. “All indications show that this risk is not going to disappear. On the contrary. As such, we see the development of these ILS instruments as a vital element to support this growth,” concluded Hatzor.

The possibilities are outlined in Cloud-in-a-Box: Securitizing Cloud Outage Risk, a new white paper published by the company.