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Insurance-Linked Securities Proposed for Cyber Risk Transfer

by Celia

The Geneva Association has highlighted the potential of alternative risk transfer (ART) mechanisms, such as insurance-linked securities (ILS), in addressing the growing threats posed by cyber risks. The global market for cyber insurance premiums reached approximately $15 billion in 2023, up from $1.5 billion in 2013.

In a recent report titled “Catalysing Cyber Risk Transfer to Capital Markets: Catastrophe Bonds and Beyond,” the association pointed out that as digitalization accelerates, businesses are increasingly exposed to cybersecurity risks, including ransomware, data breaches, and IT outages. These risks have now become a significant concern for many industries.

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Despite the rapid growth of the cyber insurance sector, there remains a notable protection gap. Traditional reinsurers are struggling to absorb the potential losses from catastrophic cyber incidents, leading experts to call for additional solutions.

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The report stresses the importance of ILS, such as catastrophe bonds, in attracting additional risk-bearing capacity from outside the re/insurance sector. These mechanisms could help address the current challenges and ease the pressure on insurers.

Jad Ariss, managing director of the Geneva Association, emphasized that tools like catastrophe bonds—traditionally used for natural disasters—could substantially increase risk-absorbing capacity, especially in the case of catastrophic cyber events. This would help close the significant global protection gap.

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Darren Pain, Director of Cyber at the Geneva Association and author of the report, noted that while interest in cyber ILS is growing, the market is still in its early stages. He identified challenges such as the complexity of cyber risks and the lack of standardization in policy coverage.

“Advances in modelling capabilities and greater policy standardization will be crucial in building investor confidence and unlocking the full potential of ART solutions for managing cyber risks,” Pain stated.

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