According to a new report authored by Tom Johansmeyer, Global Head of Index Classes, at broker Price Forbes Re, several forms of reinsurance could help support longer-term cyber re/insurance market growth, however, new sources of capital will have to form, along with participation from the insurance-linked securities (ILS) market.
Johansmeyer notes that the use of new sources of capital to help transfer cyber risk outside the traditional insurance and reinsurance system could make it easier for the market to absorb more cyber risk and manage it appropriately.
“Ultimately, that would not only speak to the insurability of cyber but new ways to grow the class of business significantly, ultimately increasing its value as part of a robust and comprehensive cyber security strategy,” Johansmeyer explains.
Fears of cyber war, systemic risk, and the unknown, has kept capital out of the re/insurance market, which ultimately limits the amount of protection it can offer, which winds up increasing the economic security vulnerability associated with cyber risks.
Further into the report, it is revealed that reinsurance broker Gallagher Re projects that cyber reinsurance premium will reach a staggering $80 billion by 2033, from $6.5 billion in 2023, which would edge it ahead of the size of the property catastrophe reinsurance market,
But, as Johansmeyer notes, the growth of the cyber reinsurance market would come without any meaningful change to reinsurance cession rates (around 50%), requiring further capital allocation to cyber risks by reinsurers.
Whilst new forms of reinsurance could help fuel longer-term growth across the cyber re/insurance market, the capital markets can play a significant role towards achieving this.
Johansmeyer explains: “Long seen as a potential source of capital for cyber re/insurance, ILS market has increased its participation in cyber risks, recently.
“From a mere $500 million over the five years ending in 2001, ILS positions in cyber re/insurance pushed past $1 billion in 2023. The issuance of new catastrophe bonds has increased the overall total, although it has been offset by some market exits. Following the three iterations of insurance company Beazley’s private cyber catastrophe bond in 2023, the company launched a public cyber catastrophe bond issuance in the fourth quarter with a target of $140 million, with additional cyber catastrophe bonds completed by Chubb, AXIS, and Swiss Re.”
Read more about these cyber catastrophe bond transactions in our Deal Directory, where you can analyse details of almost every cat bond ever issued and filter the list by peril to show only cyber cat bonds.
According to Johansmeyer, the impacts of ILS and other new forms of capital across the cyber re/insurance market will be slow to begin with.
“The effects of ILS and other new forms of capital will be slow initially and likely take years to ramp up. As the market matures, the issue of economic security and the role of re/insurance in national cyber security strategy remains a concern. Even with insurability largely addressed, the issue of likability remains.”
Johansmeyer also notes that the potential role of ILS in the cyber insurance market is still evolving.
Interestingly, Johansmeyer underlines that the need for additional capital, particularly from broader financial markets, to help the cyber insurance industry grow and achieve cyber and economic security largely focuses on major, remote, and systemic events.
“While the depth of the capital markets, with an estimated $250 trillion in global investable capital, would contribute considerable stability, there is a concern that events of such magnitude that they could not even be absorbed by the capital markets are possible.”
Switching attention to the catastrophe bond market, Johansmeyer states that the market is taking on the task of assuming systemic cyber risk, which is largely similar to its role in the property cat reinsurance sector.
He also adds that the cyber cat bonds that were completed in the fourth quarter of 2023 might provide cause for some optimism, as a collection of transactions for different specific underlying risk transfer purposes heavily suggests a step forward in scale and flexibility.
Johansmeyer concludes by explaining that the cyber re/insurance market must continue to evolve and mature.
“In doing so, it could certainly benefit from some more help. Reinsurance support has been crucial the expanding the breadth and depth of cyber insurance protection, but new sources of capital to address specific scenarios will provide the backbone for the next phase of industry growth.”
Adding: “The global re/insurance industry has already demonstrated an appetite for cyber risk, and an ecosystem has begun to grow, to include reliance on new forms of capital like ILS. It is difficult to ignore the contrarians, though. Even if their views represent the minority, their underlying concerns represent an opportunity for the re/insurance industry market to show why it sees the cyber sector as robust and insurable. In addressing contrarian views directly, the result is a pervasive education that may, in the end, help attract further capital to the sector.”
