A recent report by the Geneva Association, Catalysing Cyber Risk Transfer to Capital Markets: Catastrophe Bonds and Beyond, has underscored the potential of financial innovations like catastrophe (cat) bonds in addressing the global cybersecurity protection gap.
As digitalisation accelerates, cyber risks such as ransomware, data breaches, and IT disruptions have emerged as pressing threats for businesses worldwide. The Geneva Association noted that despite significant growth in cyber insurance - global premiums surged from $1.5 billion in 2013 to $15 billion in 2023 - coverage still addresses less than 1% of total property and casualty (P&C) insurance needs.
The report attributes this gap to the challenges posed by extreme and uncertain cyber risks, which exceed the capacity of traditional re/insurance providers. To bridge this gap, the Geneva Association suggests tapping into capital markets through Alternative Risk Transfer (ART) mechanisms, including insurance-linked securities (ILS) such as cyber cat bonds.
While the concept of ILS for cyber risks has existed for years, the market is still in its infancy. The report highlights a notable milestone: a series of cyber cat bonds issued since 2023, including significant transactions by major insurers such as AXIS, Beazley, and Swiss Re. These securities, designed to transfer extreme cyber risks to investors, indicate a step toward diversifying risk-bearing capacity.
According to Jad Ariss, managing director of the Geneva Association, scaling the cyber insurance market demands “fresh thinking and new sources of capital”. “Tools like cat bonds, which have predominantly been used so far for natural catastrophes, could significantly boost risk-absorbing capacity to cope with catastrophic cyber incidents and help narrow the huge global protection gap,” he said.
However, the report also acknowledges challenges. Darren Pain, director of cyber at the Geneva Association, highlighted the complexities of cyber risks and the varying scope of coverage as barriers to broader investor participation. “The complexity of cyber risks and wide variation in the extent of coverage in policies present challenges to widening the investor base. Progress in modelling capabilities and policy standardisation will be key to fostering confidence among investors and unlocking the potential of ART solutions for cyber risks,” he said.
The report identified hurdles for expanding cyber ILS adoption. Investors remain cautious due to the nascent nature of the market and uncertainties in loss quantification. Pricing for cyber cat bonds also suggests higher risk premiums compared to natural catastrophe bonds, partly due to the unpredictable and interconnected nature of cyber risks.
Nonetheless, the Geneva Association foresees steady growth rather than rapid acceleration for cyber ILS. It emphasised that innovations, such as targeted excess-of-loss coverage and simpler policy language, could make cyber ILS more attractive to institutional investors.
The Geneva Association noted that these findings highlight the potential for financial innovation to complement traditional insurance solutions, with capital markets playing a crucial role in distributing catastrophic cyber risks. By addressing key structural challenges, the Geneva Association suggests that cyber cat bonds could eventually help close the cyber protection gap and build resilience against digital threats.
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