The cyber insurance-linked securities (cyber ILS) market is rapidly expanding as insurers look for alternative ways to manage increasing cyber risks, according to S&P Global.
Cyber insurance demand reached approximately $14 billion in premiums in 2023 and is expected to grow to $23 billion by 2026. This surge in demand highlights the growing need for robust solutions to manage the risks associated with cyber threats. As a result, assessing the creditworthiness and associated risks of cyber ILS transactions has become increasingly crucial.
S&P Global Ratings has identified several key factors that influence the credit quality of cyber ILS, including regulatory risks, policy terms, cedent risk, asset collateral, and the complexities of modelling cyber-related risks.
A significant component of the cyber ILS market is the cyber catastrophe bond. These bonds allow insurers and reinsurers to transfer part of their cyber risks to the capital markets, providing them with additional capital to absorb losses from ransomware attacks, data breaches, and cloud outages.
Since the start of 2023, the market has seen 10 cyber ILS issuances from five cedents, amounting to over $800 million. The largest issuance reached $210 million, with coupon rates ranging from 9.5% to 13.25%, reflecting the high-risk nature of these bonds. Despite limited investor participation, demand for coverage against extreme cyber risks continues to rise, with most investors focusing on per-occurrence excess-of-loss structures rather than more frequent, lower-severity events.
However, the market faces several challenges, including the difficulty of modelling systemic risks, the potential for contagion from cyberattacks, and the limited historical data on cyber-related losses. To support further growth, experts emphasize the need for better policy standardization, simplified contract language, improved risk modelling, and greater transparency in cyber incident attribution.
Despite these challenges, the cyber ILS market is expanding rapidly and could eventually exceed the $50 billion size of the natural catastrophe ILS market within the next decade. The ongoing evolution of regulatory frameworks and the increasing complexity of cyber threats will continue to influence investment strategies and risk management practices in this developing market.
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