In an interview with A.M. BestTV at Artemis’ second ILS conference in New York City, PCS Assistant Vice President (AVP), Tom Johansmeyer, discussed the potential for the insurance-linked securities (ILS) market to expand further into the cyber space, after proving its worth in 2017.
Johansmeyer said that he’s heard cyber described as potentially the next U.S. property catastrophe, in terms of size, underlining the huge potential for growth but stressing that challenges persist.
“Property cat is well-defined, well modelled, broadly understood. Cyber, everyone keeps saying, ‘I want to wait and learn more and watch people and see how I can understand this.’
“The challenge is, it is still small. So last year’s probably $2.5 billion in premium worldwide, cyber I’ve seen as about 15% penetrated in the U.S., and about 1% outside the U.S., so lots of room for growth. Which means, you need lots of capacity,” said Johansmeyer.
He noted that in the near-term, a challenge particularly on the reinsurance side, could be struggles with having significant capacity to provide cover for the unpredictable, fast growing, and rapidly changing cyber risk landscape.
“So, if you’ve got a large primary insurer, got the balance sheet to write, they’ve got some flexibility, they are going to want more reinsurance at some point, reinsurers are going to need to bring more capital to bear on those solutions.
“So, I think the challenge right now is marshalling enough capital onto the reinsurers balance sheets so they can more effectively serve their primary market clients, in this growing line,” said Johansmeyer.
He continued to highlight the potential for ILS capacity to make headway into the cyber sector via an index trigger in an ILW structure, stating that there’s likely to be a lot of potential for retrocessional trading, which, has so far been very small for cyber risk.
“And that’s where I think you need to see an ILW play, because that will help make it easier for the ILS players to enter the cyber market,” said Johansmeyer, continuing to explain that an index trigger in an ILW structure reduces the need and reliance on understanding “all of the details an intricacies of underlying cyber cover,” as it’s then the reporting agent, such as PCS, that needs to be understood.
“So, this could provide a little more velocity to reinsurance capital coming into the market, which then flows down to the insurer and the original insured.
“So, as we see rapid growth, particularly in the wake of an event like Petya/NotPetya, where you’ve had a couple of people coming in with $300 million programmes, brand new, it’s a lot of capital.
“Someone has got to supply it, and having that robust, well-developed supply chain for capacity will make a huge difference. And right now, all eyes are on the retro market to see what can be done on an ILW basis to flow that capacity in more effectively,” said Johansmeyer.
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