Capital markets could be broader reinsurance source for cyber risk, says Fitch
Fitch Ratings says capital markets solutions for cyber (re)insurers could be a broader reinsurance source for the risk, as shown by two recent public announcements of cyber risk transference by (re)insurers to the capital markets through insurance-linked securities (ILS) issuances.
Fitch said that cyber risk has been transferred to capital markets on a private basis through collateralised reinsurance deals in the past. But the two 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, the ratings agency explained.
According to Fitch, primary insurers cede an estimated 50% of direct cyber premiums, with the majority of risk concentrated in the largest global reinsurers and the Lloyd’s market.
Fitch noted that capital markets solutions for cyber (re)insurers present the potential for counterparty diversification and an opportunity to lessen ‘tail risk’. “Wider development of the cyber risk transfer market requires further maturation of the product, including greater standardisation of coverage terms and policy language, price discovery and risk modelling applications,” said Fitch.
There are a number of challenges when it comes to assessing cyber risk, said Fitch, including 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. Fitch said 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.
Noting the two deals, Fitch said Fermat Capital Management was the main investor to the Beazley-sponsored ‘Cairney’ cyber bond of $45m, providing excess-of-loss coverage for cyber claims exceeding an attachment point of $300m, while Stone Ridge Asset Management provided the funds for Hannover Re’s $100m collateralised reinsurance deal on a quota share arrangement.
