December 5, 2023

Expanding the insurance-linked securities (ILS) asset class into other business areas such as cyber risk is unlikely to be a case of reallocation from real estate, Artex Capital Solutions executives believe incremental growth in non-catastrophe ILS is to be expected .

artex-risk-solutions-logoIn a paper discussing the potential of cyber cat bonds and other cyber ILS vehicles, Artex Capital Solutions CEO Kathleen Faries and Executive Vice President of Insurance Management Services Scott Cobon lay out some of the challenges facing ILS investors as they adapt to the new class of risk. challenge.

While the development of cyber as an ILS category is still in a relatively early stage, Artex Capital Solutions executives believe that good progress has been made so far and look forward to sponsoring the first 144a cyber disaster bond.

They acknowledge, however, that investors need to continue to understand the risks of this new class of ILS, and that investors need incentive risk models that are sufficiently mature and robust to support the issuance of network ILS securities.

“As real estate CAT performance begins to stabilize and improve following a bout of extreme weather and disaster events, we may see a pattern of investors beginning to adjust portfolio allocations to include cyber CAT bonds as they gain confidence in the structure, pricing and market become more satisfied/risk-relevant,” wrote the Artex executive.

By extension, “This will often prompt consideration of the extent of allocation adjustments needed to achieve desired prices and yields, and investors will begin to test the waters in cautious, gradual steps.”

But they don’t see the potential for emerging ILS categories such as cyber or the much-discussed non-cat ILS field to take away meaningful assets from already established markets in terms of real estate catastrophe risk.

“Do we think investors will immediately reallocate funds from real estate CAT to cyber and other ILS-based risk areas? Not likely.

“The most likely outcome is a slow increase in capital inflows into the network and network capacity increases as investor confidence increases,” Faries and Cobon explain.

Kathleen Faries, CEO of Artex Capital Solutions, explained that there is still a lot of work to be done across the cyber insurance and reinsurance market before it scales to meaningful cyber cat bond activity.

“A pressing issue is the impact of a major systemic loss such as a cloud service outage, which would affect multiple businesses globally simultaneously. This is a major event scenario that the insurance industry is currently grappling with,” Faris explained. “There are deep discussions about how to deal with potentially large systemic cyber losses. One way is to build public/private support, as we have done for terrorism risks. To address large systemic losses, Much work still needs to be done around modeling determinism and capacity challenges.”

Scott Cobon, executive vice president of insurance management at Artex, emphasized the need for continued efforts to improve cyber risk models, but he believes progress is being made on more cyber ILS transactions.

“We are at an interesting time in the ILS market discussion and the real test of the acceptance and adoption of mature Reg 144A CAT bonds will involve investors becoming more comfortable with the risk modeling platforms currently available and in turn becoming more comfortable with risk modeling . Agencies/experts are satisfied with their modeling capabilities and level of sophistication.

“There is still a range of risk factors that need to be fully understood. While there is further work to be done, given the pace at which the cyber risk space is evolving, it is possible that we will see positive developments over the next 12 to 18 months. As the industry and Investor discussions progress in 2023 and 2024 and we will continue to monitor developments,” Cobon said.

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