Cyber ILS market grows as insurers seek alternative risk transfers

Cyber insurance demand is seen to reach $23b by next year.

The cyber insurance-linked securities (cyber ILS) market is growing as insurers seek alternative risk transfer solutions to manage escalating cyber threats, S&P Global said.

As cyber insurance demand increases, reaching approximately $14b in premiums in 2023 and projected to rise to $23b by 2026, assessing the creditworthiness and risks associated with cyber ILS transactions is becoming more critical.  

S&P Global Ratings identified key factors influencing cyber ILS credit quality, including regulatory risks, policy terms, cedent risk, asset collateral, and modelling challenges. 

Cyber catastrophe bonds, a subset of cyber ILS, allow insurers and reinsurers to transfer a portion of cyber risk to capital markets. 

These bonds help mitigate financial losses from ransomware attacks, data breaches, and cloud outages, providing insurers with additional loss-absorbing capital.  

Since January 2023, the market has seen 10 cyber ILS issuances from five cedents, totalling over $800m. 

The largest issuance reached $210m, with coupon rates between 9.5% and 13.25%, reflecting the high-risk nature of these bonds. 

Whilst investor participation remains limited, demand for extreme cyber risk coverage is growing, with most investors focusing on per-occurrence excess-of-loss structures rather than frequent, lower-severity incidents.  

Cyber ILS faces challenges such as systemic risk modelling, cyber attack contagion, and limited historical loss data. 

Market growth will depend on improving policy standardisation, simplifying contract language, refining risk modelling, and increasing transparency in cyber incident attribution.  

Despite these hurdles, the cyber ILS market is expanding rapidly and could surpass the $50b natural catastrophe ILS market within the next decade. 

The evolving regulatory landscape and complexities of cyber threats will continue to shape investment strategies and risk management practices in this emerging sector.