While 2025 has been quiet so far in the 144A cyber catastrophe bond market, interest in this risk class continues to rise and Brittany Baker, VP of Solution Consulting at CyberCube told us that investors are increasingly working the peril into their investment and fund mandates to be ready when the next issuance comes.
Speaking with us at the Monte Carlo Reinsurance Rendez-vous, Baker explained that the specialist cyber risk modelling company is feeling more engagement from the market about cyber insurance-linked securities (ILS) on all fronts.
Speaking about the lull in cyber cat bond issuance over the course of 2025 so far, Baker explained, “Everyone wants to see a new market grow in a straight line, up and to the right, and that’s just not how it works. There will be step changes.
“I definitely hear conversations, people are considering it. So it’s a viable option. It’s a viable market that people are interested in, you just have to wait for the time to be right for that new sponsor to come to market.”
She added that cyber ILS goes beyond cat bonds, saying, “We’re also hearing people both executing and considering cyber ILW’s and sidecars, so obviously less public but that market is building.”
Baker continued to explain, “We’re always out educating the market and especially investors. I think what people want to see is more of a track record. That was one of the themes when that first class of cyber cat bonds came to market as well. By the end of it, frankly, there weren’t modelling questions. After the questions, investors were most interested in how this is going to work in practice, from the modelling all the way through an event, the reporting and how long capital could be locked in.
“We continue to hear interest, we continue to see more investors working cyber into their investment and fund mandates to be ready, even if they haven’t yet participated.”
After the initial flurry of cyber catastrophe bonds came to market it was relatively quiet on the secondary side to begin, as investors and funds that did not participate in the initial issuances worked to understand the new peril.
Now, Baker highlighted that secondary trades are now being seen saying, “That shows a broader acceptance and people getting up to speed, we’re hearing folks are trading cyber bonds on the secondary market. So I think that’s really exciting to see.
“It is a market that I think will continue to grow, and that’s one of the pieces that needs to fall into place.”
The first cyber catastrophe bonds have been paying attractive spreads above expected loss, making them an asset many ILS funds have chosen to buy and hold.
In part this was down to the novelty premium paid for an entirely new perils as it entered the cat bond market, but Baker believes that added premium will have to come off deals in the future.
“Certainly as you speak to potential sponsors, they’re looking for that to come off,” she explained. “I think the first class did a really good job of setting up the structure and the framework for it.
“Obviously, the investors like that premium but I think in order to build a sustainable future that novelty premium will need to come off.”
For some investors there is a wait and see mode to find out how the first class of cyber cat bonds and their sponsors react after a major cyber loss event occurs.
Seeing a large cyber event could stimulate more activity Baker believes.
She told us, “That would definitely help. I think it would particularly really help in investors seeing the track record of how the market or how the industry responds. So even if it’s something that hasn’t attached, but that you see the index providers report on, yes, that would really help.
“Maybe it didn’t attach this time, but this is how that framework got put into action and so when we do have the one that attaches they feel comfortable in the cyber ILS market structures that are in place.”
Artificial intelligence (AI) is a hot topic in cyber insurance and risk modelling, with some uncertainty over how AI affects the cyber threat landscape, as well as how risks associated with its roll-out and use could introduce new threat vectors.
Baker said that, “Right now we’re still in wait and see mode, research mode, of what AI means for the sector.”
Saying AI raises a number of questions for the cyber reinsurance and ILS landscape including, “Does it shift the frequency landscape in one way or the other? Does it shift the severity landscape? Are there new systemic scenarios to consider? Do you need to rewrite old systemic scenarios and how does that fall into other lines of business?”
CyberCube has been busy updating its solutions for the re/insurance and ILS market, Baker said, including a recent update that introduces features that are relevant to ILS investors in helping them gain a more granular understanding of the peril.
“We just released our latest version of Portfolio Manager (PM v6) in July. There were two really important themes there that help the industry in general and certainly that builds interest,” Baker explained. “One was around diversification and regionality. I think lots of people like to think cyber is everywhere, it can be everywhere, and that’s certainly true, but only to a point. So what we did is we explicitly are modelling regional cloud impacts and regional malware impacts. So we still believe that there are global impacts and global events that are out there, but we also wanted to reflect those regional events more explicitly, not that it wasn’t in the loss curve.”
A second area of focus for CyberCube has been on incorporating risk mitigation factors into its model and analytics.
Baker told us that, “Mitigation is the other one, so allowing for differentiation between insurers and cedents is really important. I think CyberCube’s mitigation risk factors is one of those numbers that should help bring deals to market when we see the next cat bonds.
“It’s explicitly recognising that security practices like data backup frequency management, patch management, network segmentation, all have very clear impacts to how an individual company is impacted by a systemic event. That creates a really good feedback loop with underwriting. So what are you doing in underwriting, are you asking those questions, are you demanding that level of sophistication for their insureds and feed it up to accumulation, so you get credit for that.
“So then the capital markets can see that and differentiate through sponsors that might have different strategies and different practices, all the way through the structures that are being proposed and the pricing.”
Read all of our interviews with ILS market and reinsurance sector professionals here.
