Institutional investors remain cautious on cyber cat bonds

A lack of institutional investor uptake will likely slow growth in the cyber catastrophe bond market, according to participants in The Insurer TV’s ILS panel at this year’s Rendez-Vous in Monte Carlo.

Stephan Ruoff, co-head of private debt and credit alternatives at Schroders Capital, said the cyber market was not yet at a stage to meet the stringent regulatory scrutiny that institutional investors must comply with, as well as expressing concern around the liquidity of bonds.

“The cyber market, especially on the cat bond side, is not mature enough for large institutional portfolios.

“We are still struggling to incorporate these instruments [cyber cat bonds] into those portfolios because of concerns around liquidity.” added Ruoff.

The recent CrowdStrike outage has further deepened Ruoff's concerns.

“The CrowdStrike event showed that there are a number of questions after the event that have not been fully worked through,” Ruoff added.

Twelve Capital has also chosen so far to avoid cyber ILS, as many within its investor base don’t want to be exposed to cyber.

This is due to the correlative nature of cyber risks according to Christoph Buerer, co-founder of Twelve Capital.

“Whatever we do in the space is a function of investor interest and appetite. And if I look at our investor base, some of them distinctly, categorically, don't want to be exposed to cyber,” he said.

Buerer said a cyber event – much like mortality and pandemics – had potential to travel around the world, making intra-class diversification more challenging.

Maintaining relevance

Aon’s Paul Schultz was far more optimistic about the future of cyber cat bonds, perhaps unsurprisingly given Aon’s role in structuring the first 144A cyber catastrophe bond. He viewed the space as primed for success and key to the continued growth of the ILS market.

“The foundation of ILS is still going to be property – there’s no question about it. But as we innovate and grow, it’s inevitable that we will expand into products like cyber. It will be a continuous process,” Schultz said.

“It will take some time. But as a reminder, in the early days of property, we considered $1bn in a year to be a fantastic result. You just have to maintain the right perspective on time,” Schultz added.

While Ruoff and Buerer were less optimistic than Schultz in the short term, they acknowledged that cyber risks would eventually find their way into the ILS space, especially if the market wants to remain relevant.

“The thing is, you cannot ignore cyber as the whole society and the economic constitutive. You have to have an answer to that and be relevant,” Buerer said.

“I think cyber is probably one of the single most largest risks emerging that will need risk transfer over time,” Ruoff added. “I’m convinced, over time, we’ll manage ourselves into it [cyber ILS].”

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