Investor appetite is strong for more cyber ILS deals

There is clear investor demand, including from non-insurance-related investors, to take cyber insurance risk—a demand that can now be tapped thanks to innovative structures developed by carriers including  Beazley designed to transfer these risks into the capital markets.

That is the view of Paul Bantick, global head of cyber risks, Beazley. Speaking to Intelligent Insurer in a video interview, he said it is clear that demand for cyber insurance coverage will increase exponentially to around $30 or $40 billion within the next few years—and an appetite in the capital markets to take these risks will become key to satisfying that need.

“The cyber markets are expected to boom in next four or five years, so this is not about something we need today. This is about the future of the cyber market and where it’s going,” Bantick said. “Hopefully we’ll see a market emerging that can meet the growing demand that insurers are going to have. We want to grow as an industry and maintain the integrity of the product and keep evolving the product.”

Bantick was speaking around a month after Beazley closed what it described as the “market’s first” cyber catastrophe bond in early January with backing from a panel of major insurance-linked securities (ILS) investors. The deal was the first time that a liquid ILS instrument had been created for cyber catastrophe risks. The bond is designed to cover remote probability catastrophic and systemic events.

The $45 million private section 4(2) bond is fully tradeable under Rule 144A resale and gives Beazley indemnity against all perils in excess of a $300 million catastrophe event. The deal, backed by a panel of ILS investors including Fermat Capital Management, has the potential for additional tranches to be released through 2023 and beyond. It was structured and placed by Gallagher Securities.

Further investor interest

Bantick is not shy about the significance of the deal. “I hope it’s a landmark, a milestone,” he said. “We’re extremely proud of the deal. It was two-and-a-half years in the making. We spent a lot of time educating investors, teaching them not only about systemic cyber events and catastrophic cyber events, but also the cyber business at Beazley: how we manage it, how we think about risk, how we navigated the choppy waters with ransomware.

“It was very important to sit down and talk in person. Then we had to take it back to basics. We had to learn a lot about investors: how they view insurance, how they view these deals. We needed a different terminology. I also wouldn’t underestimate the role that your advisor plays in helping you bridge that gap,” he added.

With those foundations laid, Bantick is bullish about the appetite of investors for further participation—and future deals. He said the first aim is to increase the size of this first placement to $100 million. After that, he anticipates further deals on the back of strong investor interest.

“The existing investors would potentially like to do more. Additional investors have reached out to us and asked: how do we get involved, how do we invest? We have aspirations to grow this to be a much bigger vehicle and a much bigger investment. We’re working on a strategy for that, and we have a group of new investors we’re looking to go on that journey with,” he said.

“What has been interesting is the amount of non-insurance-typical investors who are interested. These are people, perhaps clients we interact with, who have reached out and said: ‘how would we be able to invest in a vehicle like this?’. It’s been surprising and nice to see is just how much interest there is outside the normal ILS bond investment ecosystem.”

Bantick said his key takeaway is around the importance of educating investors—spending a lot of time with them discussing different scenarios and solving problems. If that time is invested, anything is possible, he said.

“There’s a realisation that if you spend the time with investors, bring them in and show them how you think about cyber, systemic cyber, catastrophic cyber, and how you manage it, it will breed that confidence.

“Cyber is not yet as big as property, but if it gets towards the $30 billion mark that means giving coverage for things such as systemic cyber and catastrophic events. We would need to ensure we meet that demand. With more buyers coming online, we’re going to need lots of different tools at our disposal. And this could be one of the key tools,” he concluded.