Solidum Partners AG, the Swiss insurance-linked securities (ILS) investment manager, has revealed that while it has not yet invested in cyber catastrophe bonds, the company is closely monitoring the market as it continues to develop.In its latest market commentary, the ILS investment manager highlights how many ILS investors are attracted by transparent, parametric triggers (e.g., wind speed, quake magnitude), while also noting that cyber cat bonds with parametric or modelled-loss triggers have been tested but remain niche.“Investors remain cautious because the peril is not well understood, and traditional indemnity- based triggers amplify uncertainty.Still, some investors see cyber as a growth opportunity, since it is one of the fastest-growing insurance markets, and there is strong demand for (re)insurance capital,” Solidum Partners AG said.

Interestingly, the ILS investment manager stresses that while cyber is attractive from a growth and yield perspective, until further improvements are made within modelling and legal frameworks, it will remain a “niche allocation” for ILS investors.Concurrently, the firm states that traditional ILS perils such as hurricanes and earthquakes benefit from decades, and sometimes centuries worth of event data, as well as increasingly sophisticated probabilistic models.While cyber lacks a long history of catastrophic “tail events”.

“Small and mid-sized losses are common, but the full extent of a systemic, market-moving cyber catastrophe (e.g., global cloud outage, widespread ransomware against critical infrastructure) has not yet materialized,” Solidum Partners AG added.Cyber risk in the ILS market is still a very new area, and the understanding of it, while increasing, does remain relatively limited as a result.However, we expect that the market will continue to innovate around cyber risk, as more is learned from events that occur, whether they threaten the cat bonds in-force or not, and that this could in time potentially also drive improvements to catastrophe bonds more broadly.

Certainly, there remains much to learn on cyber within the ILS market, and extended loss development timelines can unexpectedly arise, depending on the particulars of an incident (as observed in natural catastrophe risks).“Cyber has certainly the potential to diversify returns if carefully structured (especially parametric triggers on clear metrics like cloud downtime, internet traffic anomalies, or ransomware incident counts).The tail risk is systemic and legal, not just financial.

Unlike a hurricane, cyber’s correlation and attribution problems mean ILS investors face much greater model uncertainty,” Solidum Partners AG said.“As of today, Solidum has not yet invested into cyber bonds, but is closely monitoring the developing market.Solidum will consider cyber as a satellite allocation, but will select only those cyber Cat Bonds that are carefully structured and pass a detailed and stringent scenario testing.

“Apart from its certainly attractive premiums, the risk factors must be considered in detail.Furthermore, our portfolios are traditionally very lowly correlated to macro economic shock events.The correlation impact of adding cyber to the portfolios must be carefully evaluated,” the ILS investment manager added.

Concluding: “Adding cyber must also be evaluated by comparing it with other alternatives.As an example, one could add a similarly yielding, higher risk “Nat-cat” Cat Bond to the portfolio.The cyber bond has to be at least as attractive, so one must not forget or neglect alternatives in the more traditional space of ILS.” 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, ..

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