The cyber insurance-linked securities (ILS) market is emerging as a critical alternative capital source for the expanding cyber insurance sector.
With over US$750 million deployed in underwritten Rule 144A catastrophe bonds, the market is drawing increasing attention from ILS investors. Cyber ILS provides underwriters with tools to manage systemic risks and expand capacity amid a growing demand for cyber insurance.
According to Gallagher, the cyber insurance market is projected to more than double over the next decade, driven by heightened awareness of cyber risks. Cyber ILS serves as a mechanism to expand the pool of capital available to support the sector’s growth.
Additionally, it provides essential alternative capital during systemic cyber events when traditional insurance markets may face capacity constraints, helping ensure market stability and recovery.
As demand for cyber ILS grows, further issuances are expected from both new and existing sponsors. Gallagher notes that specialized expertise in cyber risk, securitization, and structuring will be essential for sponsors to capitalize on these opportunities.
The market has made notable progress since its inception, according to Gallagher. Investor interest began in 2017 with the first collateralized reinsurance transaction for cyber risk. The market has since evolved, driven by demand, product innovation, and increased confidence in managing cyber risk.
Key milestones include the Cairney transactions, sponsored by Beazley and placed by Gallagher, which introduced scalable catastrophe bond lite structures in 2023. In 2024, these developments continued with Rule 144A catastrophe bonds such as PoleStar Re Ltd., Long Walk Reinsurance Ltd., and Matterhorn Re Ltd., with PoleStar 2024-3 securing US$210 million, the largest cyber cat bond to date.
For sponsors, cyber ILS issuances not only enhance reinsurance capacity but also offer greater strategic flexibility. Utilizing ILS solutions allows sponsors to scale their portfolios and manage potential large-scale events.
Gallagher notes that while the direct impact of these strategies on share prices is yet to be determined, transferring tail risk off balance sheets may improve the weighted average cost of capital over time, benefiting sponsor valuation.
Cyber ILS pricing currently aligns with peak US catastrophe risks, with a risk-to-spread multiple of 4.6. Higher risk interest spreads reflect uncertainty and the novelty of the peril. Gallagher observes that reducing this "innovation premium" will be key to attracting more sponsors and fostering broader market participation.
Over time, advancements in risk modeling and growing investor familiarity with cyber risks are expected to drive more competitive pricing, making cyber ILS an attractive option within rated markets.
The increasing participation of ILS investors highlights the perceived investment opportunities in cyber risk. As Gallagher points out, improved cyber risk modeling and greater awareness of evolving threats are supporting investor confidence.
With a growing pool of investors and deployed capital, the market is poised for further expansion, offering sponsors a broader range of risk management tools.
The future trajectory of cyber ILS will depend on refining contract terms, addressing pricing uncertainties, and expanding product offerings. Gallagher emphasizes the importance of ongoing market education and alignment between sponsors and investors.
Progress in these areas will enhance the market’s ability to address challenges, unlock opportunities, and scale alongside the broader cyber insurance market.
Innovations in cyber ILS products, such as sidecars and aggregate protections, are also expected to support market growth. Sidecars allow third-party investors to assume portions of insurers’ cyber risk portfolios, while aggregate protections address losses from multiple events over a specified period.
These developments aim to provide additional capacity and flexibility for insurers and reinsurers.
Gallagher notes that the maturation of the cyber ILS market will rely on continued innovation, refinement, and collaboration between traditional and alternative capital markets. The sector’s growth will play a critical role in meeting the expanding needs of the cyber insurance market while offering investors new opportunities for portfolio diversification.
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