According to Gallagher Securities, the specialist insurance-linked securities (ILS) and investment banking arm of reinsurance broker Gallagher Re, the future of the cyber ILS market is not a question of growth, but rather how quickly the market can evolve to meet evolving opportunities and challenges.As the cyber ILS market continues to expand, with a wide range of products designed to meet the needs of sponsors and investors, Gallagher Securities claims that while existing instruments such as 144A cat bonds remain foundational, “the development of new solutions is expected to play a critical role in supporting the cyber market’s future growth.” In their latest whitepaper, Gallagher Securities explains that as the cyber reinsurance and insurance market continues to grow, concurrently, so will demand for cyber ILS, attracting further offerings from new and existing participants.The firm notes that the pricing dynamics of cyber ILS are currently like those of peak US catastrophe risks, carrying a risk-to-spread multiple of 4.6, with higher risk interest spreads reflecting the perceived uncertainty and novelty of the peril.However, the broader ambition is to reduce this innovation premium over time, bringing it to a level where it remains competitive with rated markets, which according to Gallagher Securities, “would help attract more sponsors to the space, providing investors with increased opportunities to diversify their portfolios across different geographies, product lines, and risk appetites.” “The positive momentum generated by the first Catastrophe Bond issuances has driven greater participation from ILS investors, who are increasingly recognizing the strong investment opportunity cyber presents,” the firm said.

“The attractive returns are further supported by advancements in cyber risk modeling and increased education about evolving threats.As a result, the number of investors in the space has grown, and the product spectrum is set to continue developing, offering sponsors a wider range of risk management tools.” Since their introduction to the ILS market in 2023, there have been 10 cyber cat bonds.As a reminder, you can read about every cyber cat bond transaction, including the first private cat bond deals and the more recent 144A cyber cat bonds, Moreover, Gallagher Securities notes that sidecars – which have already started to be successfully deployed across the cyberspace – symbolises potential for innovation across the cyber ILS market.

“By allowing third-party investors to assume a portion of an insurer’s cyber risk portfolio, sidecars offer a scalable mechanism to bring additional capacity into cyber risk programs.As the sidecar market grows, it will provide insurers and reinsurers with greater flexibility in managing capital, while enabling investors to selectively align their participation with specific risk appetites,” the firm said.As well as this, Gallagher Securities states that the development of aggregate protections, those that cover losses from multiple cyber events over a specified period, will be particularly valuable towards addressing systemic risks.

The firm added: “These protections expand the market’s capacity to respond to mid-frequency, midseverity events, further enhancing resilience.Collectively, these product innovations will underpin the Cyber ILS market’s ability to scale alongside the broader cyber insurance market, ensuring a sustainable flow of alternative capital.” Further advances in cyber risk modeling and data analytics are also said to be “driving a growing consensus around terms and conditions in cyber ILS contracts,” with this progress enabling sponsors and investors to align more effectively on clear and adaptable contract structures that address the characteristics of cyber perils, such as ransomware, data breaches, and systemic cloud outages.“With each step forward, contracts are becoming more precise in defining triggers, exclusions, and coverage, reducing ambiguities and enhancing market confidence.

As models improve, datasets expand, and insights from real-world loss events accumulate, the understanding of cyber risk will continue to deepen.This iterative progress will further refine contract terms, ensuring that cyber ILS products remain relevant and resilient, even as the risk landscape evolves.” Gallagher Securities also explained that high-profile incidents across the cyber market, such as last year’s CrowdStrike outage event, have provided valuable insights into how cyber risks manifest in practice, which ultimately helps investors, underwriters, and modeling agents refine their tools.“As confidence grows in the ability to model and price cyber risks accurately, both the innovation and uncertainty premiums are expected to reduce, fostering more efficient capital deployment and sustainable market growth,” the firm added.

Furthermore, Gallagher Securities notes that the continued maturation of the cyber ILS market will be contingent on several converging factors: the refinement of terms and conditions, the reduction of pricing uncertainties, and innovation.Concluding that: “These advancements will bridge the gap between traditional and alternative capital, providing much-needed capacity for the cyber insurance sector while offering investors an attractive and diversified opportunity within the broader ILS market.“The future of Cyber ILS is not a question of growth, but rather how quickly the market can evolve to meet these opportunities and challenges, unlocking its full potential to transform the cyber (re) insurance landscape.”.

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