Investment - Articles - Cat modelling is crucial key to unlocking cyber ILS capacity


The financial impact of a future global software failure could be so great that the (re)insurance industry is likely to require additional capacity from the capital markets.

 Since their birth in the 1990s, insurance-linked securities (ILS) have been used to provide protection against the effects of devastating natural disasters. A new report from leading cyber analytics company CyberCube explores how ILS could also be used to alleviate the impact of a major systemic cyber-attack.

 The report, ILS and the Cyber Market: Unlocking Potential in the Capital Markets, states that CyberCube is talking to reinsurers and the ILS community to determine the technical hurdles that must be cleared before ILS can be used in the cyber market with any degree of certainty.

 Rebecca Bole, CyberCube’s Head of Industry Engagement and one of the report’s authors, said: “For 20 years, the capital markets have played a vital role in providing capacity for peak risks where traditional (re)insurance capacity has not been available at acceptable terms and conditions, such as natural catastrophes. Cyber shares many characteristics with these risks. The challenge, in what is still a developing cyber insurance market, is to find a way for investors to have the degree of certainty they need in order to support these products. Modelling is going to play a big part in creating the appropriate level of comfort with capital markets investors.”

 Another factor that could build confidence in cyber ILS would be the existence of an industry-loss index – a referenceable portfolio of data that would indicate trends or be used as the basis for a loss trigger in insurance-linked instruments.

 Laurel Di Silvestro, Principal Client Services at CyberCube, said: “ILS investors sense an opportunity in the cyber risk market but are still treading carefully in what is a fast-evolving landscape. Unlocking the potential of ILS in the cyber market requires collaboration from right across the industry – brokers, carriers, investors and the risk modelling community. CyberCube is committed to playing its part.”

 ILS has already branched into areas such as life, accident and health. Additional popular ILS instruments include property & casualty (P&C) and specialty classes.

 Examples of a systemic cyber failure could include the malfunction of popular software, a wide-scale cloud outage or a global virus infection.

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