Cyber insurance-linked securities (ILS) remain a promising but constrained avenue for risk transfer, with structural complexity, limited market depth, and investor uncertainty continuing to hinder broader adoption, according to insights shared during a recent S&P Global Ratings webinar on cyber insurance.
While cyber ILS offers insurers and reinsurers a route to transfer exposure to capital markets, the size of the current market and the complexity of the underlying risks are acting as limiting factors.
So far, only five cedents have entered the cyber catastrophe bond space, underscoring the early stage of development.
Issuance remains a fraction of what is seen in natural catastrophe bonds, which are underpinned by around $52 billion in outstanding issuance, compared to just $1 billion for cyber.
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“There was consensus that growth in cyber ILS will ultimately be driven by growth in the underlying cyber insurance market, whose complexity and potential size make it a strong candidate for the sharing of risk across balance sheets,” S&P commented.
“Yet the experts also warned that a lack of standardisation in ILS contracts, a lack of clarity about the underlying risk, and generally limited investor understanding of the ILS market and ILS modeling would likely inhibit near-term growth.”
Ron Joas, S&P Global Ratings analyst, commented: “The risks companies are having to deal with, the changing nature of those risks, how market participants view them, and how they are managing them–these factors are driving the needs to which insurers and reinsurers are responding.”
“The need for alternate forms of capacity has led insurers and reinsurers to the capital markets and the issuance of cyber insurance-linked securities (ILS),” he added.
Despite these challenges, S&P notes that the consensus among panelists was that cyber ILS represents a an important opportunity for risk transfer as the cyber insurance market continues to expand and mature.
Over time, as data improves and investor understanding deepens, the cyber ILS space may become a more robust segment of the insurance-linked securities landscape.
Read about every cyber catastrophe bond by filtering our Deal Directory by peril to view only cyber cat bond transactions.
