In the event of a cyberattack large enough to trigger the cyber cat bonds currently on the market, state interference is likely to be required, according to Richard Gray, head of third-party capital at Beazley.
Speaking on the First Cyber Cat Bonds: What Are the Unknowns? panel at the Insurance Insider ILS London conference, Gray said the ILS market had yet to see a cyber event large enough to “test” bonds and wordings.
“Questions were raised after [hurricanes] Katrina and Andrew about how books of business were affected, but that hasn’t happened in the cyber space yet,” he said.
Kyle Freeman, ILS originations and structuring lead at Axis Re, cited the 2017 NotPetya attack as evidence the cyber-ILS market had yet to be tested.
“NotPetya was the largest event so far, but the market will need something much larger to threaten the cat-bond layers in place in the market currently,” he said.
One of the issues raised by the panellists was the lack of a major cyber catastrophe when the four 144A cyber deals came to market last year.
In addition to concerns around what a major cyber event would look like, they said, investors need to familiarise themselves with the risk, coverages and policy inclusions and exclusions.
Another key issue for panellists was cyber’s correlation with the broader financial markets.
“The correlation between cyber risk and other equity debt markets is a concern, and conversations around this will continue,” said Freeman.
He noted that cyber and hurricane risks are correlated with the equity markets “in the tail” but warned of “uncertainty about how much correlation there is when we’re not in the tail”.
According to Jordan Brown, managing director at Aon Securities, if the market is to grow, these issues must be addressed through an education process with investors.
“The market needs to do a better job at building the investor base,” he said.
“There are many investors participating in these conversations, but now it's about getting them comfortable and broadening the investor landscape to the point where they can deploy capital.”
The need for capital could quickly become a necessity, according to Freeman, given the forecasted growth of premiums in the cyber space from low double-digit billions to potentially as much as $50bn.
Gray said: “As the cyber market grows close to forecasts, now is the time to lay the groundwork and get investors comfortable with the risk before it becomes a pinch-point for capital.”