Cyber catastrophe bonds may be moving out of the shadows of private transactions and entering the public bond market.
So-called cat bonds, which shield capital markets investors from hard-to-insure risks in exchange for double-digit returns, have typically been built around natural disasters such as hurricanes. But issuers are seizing the moment, as the potential impact of a cyber-attack leading to a business outage has become too great to be covered by insurance.
Beazley, which owns specialty insurance companies in Europe and the United States, is considering issuing a $100 million CyberCat bond, according to research firm Artemis, which specializes in insurance-related securities. And Axis Capital is preparing to issue a $75 million cyber disaster bond, according to preliminary proposal documents obtained by Bloomberg.
Spokespeople for Axis Capital and Beazley declined to comment on the deal.
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The broader market for cat bonds could reach an all-time high of $40 billion this year. Much of that growth is being driven by the effects of climate change, as extreme weather shocks threaten to make insurers’ business models unsustainable. As such, some of the most active players in the cat bond market are reinsurance companies such as Swiss Re and Munich Re.
Investors are attracted to returns that outperform U.S. Treasuries. This year, the Swiss Re Global Cat Bond Performance Index has risen 18%, while the Bloomberg U.S. Treasury Index has fallen about 1%.
Issuers of Cyber Cat Bonds want to protect themselves from financial losses, such as lost revenue, legal costs, and regulatory fines, associated with large-scale cyber attacks.
A recent report co-authored by Kathleen Fairies, chief executive officer of Artex Capital Solutions, found that insurance-related securities “provide a balance to corporate boards and executives in the event of a major cyber event.” “It gives some peace of mind about the resilience of the seat.”
However, with limited historical data to analyze and increasingly sophisticated forms of cybercrime, investors face an unusually high level of risk.
“We have decades of data on hurricanes,” said Marco Della Giacoma, a portfolio manager at Tenax Capital, a London-based hedge fund that regularly invests in cat bonds. “But estimating the price of cyber risk is even more difficult.”
Tenax analyst Toby Pughe says it’s hard to trust cyber models. “If they say the loss estimate is 1%, it could actually be 5% or 6%,” he says.
Other investors said they welcomed the opportunity to increase exposure to the insurance-related securities market.
“Major cyber underwriters are now entering the ILS market with a format and pricing that we believe has become attractive, with a transparent deal structure that targets catastrophe risk rather than layoffs. “We’re seeing it,” said director Joanna Sirocca. A new market for Fermat Capital Management, one of the largest cat bond investors.
“We will consider all transactions as soon as they are announced,” Fermat said. “Consistent with the growth rate of the cyber insurance market, cyber insurance is likely to become the fastest growing area within ILS due to the relative lack of internal diversification within risk. there is.”
Paul Buntic, Beasley’s global head of cyber risk, said the threat of cyber losses is now too much for “traditional reinsurance to address.” Vantic declined to comment on specific deals, but said the message from investors is “now is the time” for cat bonds to fill the reinsurance gap.
Several Cybercat bonds have been issued to date, three of which were privately placed by Beasley. The expected new securities from Axis and Beazley are notable because they are likely to be traded on the secondary market, providing access to a wider range of hedge funds, pensions and other investors.
Hannover Re, which underwrote around 800 million euros ($856 million) in cybersecurity premiums last year, is also exploring new markets.
“We are quite confident in using cat bonds to transfer cyber risks to capital markets,” said Henning Rudolfs, managing director of the German reinsurance company. “This could happen sooner rather than later, and possibly within the next few months.”
The list of known cyberattacks is long and growing. In 2017, a virus believed to be Russian malware shut down Ukrainian banks, government agencies, pharmaceutical company Merck & Co., and shipping giant AP Moller-Maersk A/S, resulting in $10 billion in losses, according to the White House. It is said that there was a loss of . In 2021, an attack on Colonial Pipeline’s computer network disrupted U.S. oil supplies.
Cybersecurity firm Dragos estimates that ransomware attacks on industrial companies alone increased by 87% last year. And just this month, the Industrial and Commercial Bank of China suffered a cyberattack that left it unable to settle a wide range of transactions. The incident forced clients of the world’s largest financial institution by assets to reroute trades and left brokers and traders scrambling to assess the extent of the impact.
Losses due to cybercrime in the United States jumped 48% from 2021 to $10.2 billion last year, according to the Federal Bureau of Investigation. Additionally, a recent PwC survey of CEOs found that a quarter believe their company will be highly or extremely exposed to cyber risk over the next five years. That number is higher than the 22% who expressed similar concerns about the threat of climate change.
Perceived risks are reflected in costs. Munich Re estimates that the premiums companies will have to pay to insure against cyberattacks will almost triple to $33 billion between 2022 and 2027.
“Cyber risk is one of Munich Re’s key strategic growth areas,” said Chris Storer, head of the reinsurer’s Cyber Center of Excellence.
“There are enough ILS investors out there to tap into the demand for capital in the cyber insurance market,” said Theo Norris, head of cyber insurance securities at Gallagher Securities.
For Gallagher Securities, which originated and issued Beazley’s private CyberCat bonds, the goal is to “build on this by attracting even more ILS investment, supporting our customers, and ultimately making cyber insurance more available and affordable.” “to do so,” he said.
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