Clarity key for viable cyber risk ILS market, says CyberCube

Though still in its infancy, cyber security’s role in the insurance linked securities (ILS) market is very much part of the next step in its evolution. But clarity, both in terms of cover and payment triggers is vital for creating a viable market and bolstering investor confidence, according to risk analytics platform CyberCube.

The fundamentals of cyber risk are similar to natural catastrophe risk, however, there are stark differences which make it difficult to map. As a man made threat, cyber attacks are ever-changing, and there is very little data on the potential losses they can cause. This has caused growing pains for the market when looking for alternative sources of funding.

The key to cyber security’s success as an ILS product, CyberCube experts explain, is centred on contract certainty and clarity. ILS parameters need to be clear as do triggers for release. A parametric trigger in the context of a systematic cyber failure could be seen in the form of a cloud outage or a drop in a number of websites for a certain amount of time. However, outlining an indemnity trigger may prove to be a far more challenging task. With a long claims pay-out tail assessing the damage of a cyber attack could prove to be a lengthy and multifaceted task, with some of the damage still being played out. Creating clarity around these triggers will help cyber security mature in the ILS market, inviting investors to provide a much-needed seed-bed of liquidity.

Successful, robust modelling and risk analytics are also key to understanding the severity of the financial impact caused by a cyber attack, Rebecca Bole, head of industry engagement at CyberCube tells Intelligent Insurer.

“The likelihood a cyber-catastrophic event is huge, and I think this only going to increase with the potential to cause huge potential financial losses. There is already demand for alternative sources of capital and the ILS market is well placed to help provide that capacity and help alleviate losses,” says Bole.

A catastrophic cyber loss could highlight the need for alternative funding sources, creating a capacity crunch that pushes cyber insurance to the foreground of the ILS market, she says. But in the absence of this, cyber insurance must be able to produce a return for investors and it must therefore be priced attractively.

As society becomes more connected the likelihood of a systemic cyber attack is increasing with the potential to cause widespread and catastrophic damage. Alternative funding sources are needed but for ILS into branch in cyber insurance as it has with areas such as property, accident and health, the market as a whole must work together to create a viable cyber security insurance marketplace.