Growth in the cyber catastrophe bond market is likely to slow due to a lack of institutional investor uptake, according to participants on Insurer TV’s ILS panel at this year’s Rendezvous in Monte Carlo.
Stephane Ruoff, co-head of private debt and credit alternatives at Schroders Capital, said cyber markets are not yet ready to meet the stringent regulatory scrutiny that institutional investors must adhere to, and that the liquidity of fixed income expressed concern about.
“The cyber market, especially the cat bond side, is not mature enough to withstand large institutional portfolios.
“We are still having trouble incorporating these products (Cybercat bonds) into our portfolios due to liquidity concerns,” Ruoff added.
Recent CrowdStrike failures have deepened Ruoff’s concerns.
“The CrowdStrike event showed that there are many questions that are not fully answered after the event,” Ruoff added.
Additionally, Twelve Capital has so far chosen to avoid cyber ILS as much of its investor base does not want to be exposed to cyber.
According to Christoph Buerer, co-founder of Twelve Capital, this is due to the correlation of cyber risks.
“Whatever we do in this space is driven by the interest and appetite of our investors, and when you look at our investor base, some of them are clearly adamant about cyber. Some people don’t want to be exposed,” he said.
Buehler said cyber events, like fatalities and pandemics, can spread around the world, making it more difficult to diversify within the ranks.
Staying relevant
Aon’s Paul Schultz, perhaps unsurprisingly given Aon’s role in structuring the first 144A cyber catastrophe bonds, was much more optimistic about the future of cyber cat bonds. He believed that this sector is poised for success and will be key to the continued growth of the ILS market.
“The foundation of ILS remains our property, there is no doubt about that. But as we innovate and grow, it is inevitable that we will expand into products like cyber. It’s going to be a process,” Schultz said.
“It takes a little bit of time. But just to be clear, in the early days of real estate, we thought $1 billion a year was a great achievement. We just need to maintain it,” Schultz added.
Although Ruoff and Buehler were less optimistic than Schultz in the short term, they acknowledged that cyber risks will eventually invade the ILS space, especially if the market wants to remain relevant.
“The reality is that you can’t ignore cyber as a component of society as a whole and the economy. You have to have an answer to it and you have to be relevant,” Buehler said.
“I think cyber is probably one of the biggest emerging risks that will require risk transfer over time,” Ruoff added. “I am confident that over time we will be able to deal with it (cyber ILS).”
Read the full interview to learn more.
Nat cat ILS CasualtiesVarious opinions on ILS How can the ILS market maintain its growth momentum?
Publication date: Tuesday, October 8, 2024