Cyber cat ILS to remain a novelty for now: Fitch

The cyber cat insurance-linked securities (ILS) market will remain a novelty add-on to the cyber cat reinsurance market for the time being as investors have only limited risk appetite as they await greater signals that the math and models look viable.

That’s the view of Gerry Glombicki, senior director at Fitch Ratings, who was offering the agency’s views on cyber insurance ahead of the APCIA convention in Chicago this week.

“We will see incremental increases in the number of deals done,” Glombicki told APCIA Today. “The success of that will encourage others to dip a toe into cyber ILS.” 

But the outlook remains cautious; he expects a “long period of testing those waters”.

The initial splash when the first cyber ILS deals were done generated plenty of optimistic headlines. The rush to be first in the asset class in 2023 meant some four separate deals were done in close succession, although the deal size of any did not overwhelm. 

A handful of deals followed in 2024, select deals have been upsized and secondary market trades have been registered. It has been just enough to keep some headlines flowing for a segment that constitutes a very small percentage of the total ILS market. 

Not yet real growth

The investor pool doesn’t look ready and willing to drive real growth just yet, says Glombicki. 

“ILS overall is still what I’d call excess money, a diversification play,” he said. And within that pool, cyber ILS is just a diversification slush fund on the side, he suggests. The total value of deals to date is just “playing around the edges”, he said.

“Only the primary carriers have the front row insights into how the line is truly performing.”

“You don’t have any core of demand yet, just people testing it out,” Glombicki explained. “It is definitely not the most mature market, but it is going to evolve.”

Another challenge is that third party capital market investors are not close enough to cyber insurance to pull the trigger on more deals. You can read about the segment’s profit history in the news or the financial reports, but only the primary carriers have the front row insights into how the line is truly performing.

That leaves ILS players dependant on the market’s array of rather untested models, Glombicki said.

“The biggest restraint is the modelling, getting people to believe that the numbers coming out of the models are reliable and make it investable,” he said. 

The path to that reliability leads through the type of tough terrain that will, by nature, be a setback for the asset class. “The biggest thing that is going to prove it is a big loss and the resulting model maturation,” he said.

Even surviving such tribulations is no guarantee that investors can be convinced and propel the segment to success. Deep in the back of everyone’s minds is the need to prove your models against today’s risks anyway you like, big loss or no big loss. But what can you tell me about tomorrow’s risks?

“The hardest part in cyber is ‘does the past predict the future?’,” Glombicki said. “You can look at all the data and draw conclusions, but what if the risk landscape simply changes? 

“We talk about the cyber cat event as if we know what it is,” Glombicki said. “We don’t.” 

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