Introduction to Cyber Insurance Market Challenges
A recent report from the Geneva Association (GA) highlights the need for additional capital to manage complex cyber risks and maintain growth in the cyber insurance market. The report explores the potential of alternative risk transfer (ART) solutions, such as insurance-linked securities (ILS), including cyber catastrophe bonds.
Alternative Risk Transfer Solutions
Darren Pain, director of research and head of cyber at GA, notes that recent private cyber cat bonds indicate financial investors’ interest in catastrophic cyber risks. The real question remains whether the risk transfer market will see rapid growth or gradual development.
Key Challenges in the Cyber ILS Market
According to Pain, the report identifies three main challenges:
- Contract Certainty: The lack of policy standardization makes investors nervous due to uncertainties about cyber risk profiles and potential triggering events.
- Limited Participation: Few high-profile investors are involved, and the risk is skewed towards fewer participants compared to natural catastrophe bonds.
- Structural Considerations: Questions remain about whether cyber risks genuinely diversify investors’ portfolios, especially in the event of a major cyber incident.
Outlook for Cyber ILS Market
Despite concerns about cost of capital and other issues, the GA report is optimistic about the potential for cyber ILS to catalyze further risk transfer. However, it suggests a gradual development of ART solutions in cyber, similar to other nascent ILS markets.
Pain notes that market expansion is likely to be gradual, with possible catalytic events driving growth, akin to the post-Hurricane Katrina surge in nat-cat bonds.
