ILS to play a crucial capital role to support cyber market growth: Neuberger Berman – Artemis.bm

With the cyber insurance market size projected to increase in the near future, members of the Neuberger Berman ILS team have said that insurance-linked securities (ILS) will “likely play a crucial role” in providing additional capital to support said growth.

Citing a survey from PwC, Neuberger Berman’s Callum O’Rourke, Vice President, Insurance-Linked Strategies and George Caughey, Analyst, Insurance-Linked Strategies, noted in a recent report that in 2024, 43% of 3,876 business and technology executives from the world’s largest companies named cyber risk in their top 3 priorities for risk mitigation.

“This awareness, often heightened through media coverage, translates into a growing demand for insurance coverage, increasingly seen as a core component of enterprise risk management,” the firm’s analysts explained.

They continued, “Since the cyber insurance market size is projected to increase, with a compound annual growth rate of 26.1% in GWP until 2030, we believe ILS will likely play a crucial role in providing additional capital to support this growth.

“Consequently, we anticipate that the momentum of recent catastrophe bond issuances will extend into 2024 and beyond.”

Neuberger Berman also observed that the successful placement of catastrophe bond issuances at the end of 2023 suggests consensus was reached by the ILS investor community in attempts to address historical challenges in cyber-ILS placement, such as event definition and modelling.

“Efforts made by industry bodies such as the Lloyd’s Market Association (LMA) to standardize exclusionary language, particularly for systemic events arising from war, critical infrastructure failure and state-on-state operations contribute to a clearer understanding of the risks covered in ILS transactions,” the firm’s analysts stated.

According to Neuberger Berman, as more issuances come to market, ILS investors should have an opportunity to contribute to further refinement of event definitions.

The firm’s report went on, “As the ILS market continues to grow, the addition of new perils and regions that increase the opportunity set available for portfolio construction is beneficial.

“Cyber has an inherent diversification benefit if added to existing ILS portfolios since it is uncorrelated with the occurrence of natural catastrophe events.

“Furthermore, factors like insurers’ focus on exclusions and proactive monitoring of vulnerabilities lower the potential for a cyber catastrophe, further diluting the correlation with other financial markets.

“Therefore, we believe the axiom that there is a diversification benefit to a multi-asset portfolio through allocation to ILS holds, even with the inclusion of cyber.”

Concluding the report, Neuberger Berman underscored its belief that cyber (re)insurance is essential for financial protection against information technology threats and that it is set to become even more embedded in risk management practices.

“ILS have already supported market growth, and 2023 was a significant milestone, with the first-ever public 144a catastrophe bonds covering cyber perils providing a total of $415 million of capacity,” the firm said.

Neuberger Berman’s analysts concluded, “We believe that cyber as a proportion of total ILS issuance will continue to grow, and although there are complexities unique to the peril, our understanding and capabilities in quantifying this risk have improved rapidly over a short time and this should continue.

“In addition, steps taken by insurers, such as proactive risk mitigation and a focus on clearly defined policy language to improve the quality of their portfolios, will ensure that this growth is sustainable.

“We take the view that as long as strong risk-adjusted pricing continues and accounts adequately for modelling uncertainty, cyber can be considered a valid diversifying option for allocation to ILS portfolios.”

Already there is a growing role for the ILS market in cyber risk, with a number of cyber catastrophe bonds successfully issued and currently just under $430 million of risk capital outstanding connected to cyber risks.