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The emergence of an insurance-linked securities (ILS) market for cyber risk is seen as a critical component for the future expansion of that line of business, with the capital markets expected to be a key reinsurance and retrocession provider, Moody’s has said.
Moody’s Ratings sees the growth potential of the cyber insurance market as particularly strong and also notes that it is a maturing segment of the global re/insurance market.
Prices have moderated and cyber insurers are learning to better manager their exposures, with the utilisation of excess-of-loss reinsurance coverage seen as a step forward.
As the cyber insurance market learns to deal with attrition and retains more of the smaller loss events, it will increasingly rely on reinsurance for covering its peak exposures and capital base.
This presents a significant opportunity for a growing cyber catastrophe bond market, as well as for ILS investors able to allocate capital to private cyber ILS deals and cyber quota shares.
Commenting on the state of cyber insurance, Moody’s said, “The cyber insurance market has seen moderate pricing declines and some easing of terms and conditions since 2023 on strong profitability for the sector, which has attracted new capital.
“Cyber insurers have historically used quota share arrangements to manage their cyber books, generally subject to a loss ratio cap by the reinsurers.
“As profitability has improved and cyber underwriters are able to better manage attritional losses, some insurers are shifting toward excess of loss treaties to manage widespread events.
“In addition, while the cyber insurance-linked securities market is still small, several insurers have issued cyber catastrophe bonds since early 2023.”
Risk aggregation remains in focus and is a concern, with developing cyber threats and a good deal of uncertainty over both where and how they manifest, as well as how impactful financially cyber attacks can be.
The recent CrowdStrike event also showed the market that cyber exposure is not just prevalent from an attack vector, but errors and omissions in software can be a driver of loss in the increasingly digitalised and interconnected economy.
In this environment, access to risk capital is critical for the cyber insurance market to sustainably grow and manage its exposures, which the cyber ILS market is going to be one key component of.
This is especially the case as the larger cyber insurers increase their limits available, with Moody’s saying that, on a per risk basis, an insured may be able to obtain cyber insurance coverage of between $750 million and $1 billion.
With a growing opportunity and improving profitability, Moody’s notes capital is increasingly interested in cyber risks.
“Cyber insurance capacity is coming from both existing players willing to write more business and new market entrants, including (re)insurance carriers, managing general agents and insurance linked security (ILS) investors, that view the cyber market as attractive,” the rating agency said.
Adding, “Some companies have shifted toward excess of loss contracts or innovative catastrophe bonds to protect against tail risk. As of August 2024, nine cyber catastrophe bonds have been issued, offering more than $650 million in cyber coverage.”
Moody’s went on to explain, “The entrance of ILS players into the cyber insurance market is an important milestone, even though their participation is still small relative to the overall market size.
“Given the prospect of exponential growth in both cyber risk and demand for cyber insurance coverage, the participation of capital market investors in bearing some of these risks will be a key element in ensuring sufficient reinsurance/retrocessional capacity and spread of risk to support traditional writers.”
Read about every cyber cat bond transaction issued so far, including the first private cat bond deals and the more recent 144A cyber cat bond issuances, by filtering our Deal Directory by peril to view only cyber cat bond transactions.
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