Catastrophe bonds could boost cyber risk capacity

Cat bonds could significantly enhance risk-absorbing capacity.

Despite the cyber insurance market growing from $1.5b in global premiums in 2013 to approximately $15b in 2023, cyber threats like ransomware, data breaches, and IT outages have become significant concerns, warned the Geneva Association.

The Geneva Association has released a report, Catalysing Cyber Risk Transfer to Capital Markets: Catastrophe Bonds and Beyond, exploring the potential of alternative risk transfer (ART) mechanisms, such as insurance-linked securities (ILS), to address rising cyber risks.

The report highlights that extreme cyber incidents pose challenges for traditional re/insurers due to the scale and uncertainty of potential losses. 

ART solutions, such as catastrophe bonds traditionally used for natural disasters, are identified as a way to attract capital from outside the re/insurance sector and enhance the capacity to absorb catastrophic cyber risks.

Geneva Association Managing Director Jad Ariss emphasised the need for innovative approaches, stating, "Scaling the cyber insurance market requires fresh thinking and new sources of capital. 

Cat bonds could significantly enhance risk-absorbing capacity for catastrophic cyber incidents and help close the global protection gap." 

Darren Pain, the association's Cyber Director and author of the report, noted that whilst interest in cyber ILS is growing, the market is still in its infancy. 

Advancements in risk modelling and policy standardisation will be essential to building investor confidence and unlocking the potential of ART solutions for cyber risks.