Recent cyber-risk transference by re/insurers to the capital markets through insurance-linked securities issuances led to a cat bond listing on the Bermuda Stock Exchange – the market’s first cyber catastrophe bond.

The Artemis Catastrophe Bond and Insurance-linked Securities Deal Directory says the Beazley cyber cat bond 2023-1 is just over $45 million of private cyber catastrophe bond notes issued, by the Artex SAC vehicle using its segregated account named Cairney on behalf of sponsor Beazley. It was issued on the BSX January 2023.

The ILS issuances are seen by Fitch Ratings as an indication of the potential for a broader reinsurance source for the cyber-risk.

Fitch said capital markets solutions for cyber re/insurers present the potential for counterparty diversification and an opportunity to lessen “tail risk” for a rapidly growing product line of property/casualty insurance.

Wider development of the cyber-risk transfer market requires further maturation of the product, Fitch said, including greater standardisation of coverage terms and policy language, price discovery and risk modelling applications.

The Fitch statement said the cyber-risk is difficult to assess due to the dynamic, man-made root causes of claims.

“Challenges include a lack of widely accepted modelling tools and a limited data set of historical claims where past events are not necessarily indicative of future risks.

”Early deals within the spectrum of cyber-risk transfer will be comprised of cyber-risks that are easier to model and quantify and will be of modest size.

“Although cyber-risk has been transferred to capital markets on a private basis through collateralised reinsurance deals, these public transactions may represent a stepping stone to broader market acceptance that provides insurance companies additional capital, lessens counterparty risk, and a future vehicle for cyber catastrophe coverage.

“Primary insurers cede an estimated 50 per cent of direct cyber premiums with the majority of risk concentrated in the largest global reinsurers and the Lloyd’s market.

“The two deals offer different structural profiles and limited distribution.

“Fermat Capital Management (AuM: approximately $10 billion) was the main investor to the Beazley-sponsored ‘Cairney’ cyber bond of $45 million providing excess-of-loss coverage for cyber claims exceeding an attachment point of $300 million.

“Stone Ridge Asset Management provided the funds for Hannover Re’s $100 million collateralised reinsurance deal on a quota share arrangement. Fitch did not rate either transaction.

“Cyber insurance represents less than one per cent of the nearly $800 billion of total US industry direct premium written but is the fastest growing product line with DPW expanding by 73 per cent in 2021 to $4.8 billion.

“The top-10 writers of cyber insurance represent 55 per cent of DPW in 2021 (and the top-15 represent 70 per cent).

“Munich Re projects the global cyber market could reach $25 billion by 2025. By comparison, DPW for US homeowner’s multi-peril was $103 billion in 2022.

Significant rate increases by insurers in reaction to rising loss frequency and associated claims costs across the market fuelled the increase in DPW. While rate increases are moderating, global broker Marsh reports cyber renewal rates increased by an average of 48 per cent in 3Q22.

US statutory underwriting experience for stand-alone cyber policies was highly profitable from 2015-2019 with an industry direct loss ratio averaging 42 per cent for the period. Experience deteriorated in 2020-2021 with the loss ratio rising to an average of 69 per cent.