Michael Millette, Managing Partner at insurance-linked securities (ILS), reinsurance and transportation investment manager Hudson Structured Capital Management Ltd., has explained that without credible modelling, a cyber ILS market is unlikely to develop as capital won’t want to support the risk unless it has a better understanding of it.As well as leading Hudson Structured, Millette is also a board director at cyber risk focused modelling and analytics firm CyberCube.The cyber-focused company has published some predictions for 2022, one of which is that activity to develop cyber insurance-linked securities (ILS) will continue apace and there is a chance of more transactions next year.The cyber insurance and reinsurance market is lacking access to retrocession and reinsurance in sufficient quantity and structures to enable the primary market to really flourish.

The capital market and insurance-linked securities (ILS) investors has always been seen as a possible home for some cyber exposures and both CyberCube and Millette believe this presents an opportunity.CyberCube CEO Pascal Millaire explained, “There will be increased alternative capital activity in the cyber space – with tightening (re)insurance capacity, compounding pricing increases and stricter terms and conditions; cyber is more attractive than ever for alternative capital.Although the transactions will be relatively small in size, 2022 will mark an acceleration in alternative capital interest in cyber, which in the years ahead could become a material source of capacity for the global cyber insurance market.

This will be a strategically important development disproportionate to the size of the alternative capital transactions.” Millette of HSCM further explained, “One element needed in order to grow the cyber insurance market is the creation of products and risk transfer solutions that are relevant to the policyholder.This helps create demand.“Another is to have a robust supply of capital to take on this risk.

There’s currently a capacity crunch for cyber insurance, be that on an individual risk basis or on a portfolio level.In order for the industry to reach its long-term growth projections, there’s a hypothesis that we’re going to need more capital available to take on this risk than is currently available within the insurance and reinsurance markets.” Millette said that the cyber insurance and reinsurance market needs access to layers of capital to support underwriting expansion and to allow for more risk to be assumed.The industry is doing an okay job of forming capital for underwriting regular cyber insurance business, Millette said, but as you go back through the tiers of the market less capacity is available.

The cyber market has proven to be relatively dysfunctional to-date, partly due to a lack of available retro capacity, which has made it harder for reinsurers to expand their books significantly.“We’ve seen a series of fairly small and experimental placements of cyber retro in the capital markets, maybe totaling a few hundred million dollars.That will grow with time as the market starts to develop a better sense of what the realistic disaster scenarios are in cyber, what return periods are and what sort of cat layer structure and pricing the market will need to see to clear efficiently,” Millette said.

Adding that, “Once companies see this, they will gain more confidence in writing and retaining more cyber.Today, companies worry that at a certain accumulation level, they might unconsciously be putting their whole enterprise at risk.” But what’s really important is to enable capacity providers to understand those scenarios and gain a better understanding of the risk/return profile of cyber risk, as well as its potential to deliver losses.“Being able to access a layered cyber cat market is important and is just in its infancy.

The development of credible modeling may be the number one factor.Entry of regular reinsurance and capital markets players is likely to come with modeling, but not without,” Millette concluded.CyberCube said that it is actively engaging with fund managers and deal originators in the ILS space, to help them quantify and better understand cyber exposures and hopes this work will stimulate more active cyber ILS deal-flows.

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