Traditionally used for catastrophe-exposed property risks, alternative risk transfer solutions may show some promise for cyber risk if investors can get a handle on how to properly assess the threats, according to speakers at Advisen’s Cyber Risk Insights Conference, held on May 16 in Chicago.
Insurance-linked securities, primarily catastrophe bonds and sidecars, offer a diversified source of capital to organizations looking to transfer risk. Alternative capital outside the traditional insurance and reinsurance industry currently comprises about $100 billion of the world’s $600 billion insurance capital, according to Chris Lefferdink, managing director of Aon Securities Inc.
Any cedant facing capacity constraints may be interested in exploring the ILS market for risk transfer options, Lefferdink told the audience. Expanding into cyber risk has been on the radar for ILS investors for a while now as the space looks to expand beyond U.S. property catastrophe risk, but it’s not yet well understood from the investor side.
“They don’t understand it and don’t know what they don’t know about it,” he said.
Philip Rosace, senior solutions manager at Cyence Risk Analytics, explained that firms like his are helping investors become comfortable taking on cyber risk by modeling potential losses. One issue is the fact that investors in the ART market typically invest for a set period of time and then retrieve their collateral if no losses occur. With a risk like cyber, it may be harder to determine what the indemnity trigger would be for a bond and when that set period of time would end.