Aon’s Schultz: ILS has “broken through the ceiling” on cyber, but growth will be curtailed

Aon Securities CEO Paul Schultz expects the ILS market to pursue cyber in a more meaningful way following a breakthrough in the space earlier this year, with more cyber transactions anticipated in the coming months.

But given cyber’s close correlation with equities markets, this growth will likely be truncated.

Speaking on The Insurer TV, Schultz said that cyber transactions will likely grow due to the demand for risk transfer products for the peril, adding that the market can expect to see some of these deals come through in Q3 and Q4 of 2023.

“The world from a cyber perspective is certainly getting more risky, which creates more demand for risk transfer and we expect that to line up well with some of the founding principles of the ILS market, which is to provide capacity in a constrained market, as opposed to just simply providing capacity that competes against traditional reinsurance,” said Schultz.

Progress on this front has been anticipated for some time. Speaking to The Insurer TV last year, Schultz suggested the emergence of a new cyber ILS market was around the corner.

“It's great that we finally broke through that ceiling, if you will, and now have commercial transactions in the marketplace,” he said.

In January this year, Beazley announced it had secured $45mn in reinsurance coverage through the industry’s first dedicated and tradeable cyber cat bond, led by Fermat Capital.

Since then, it has secured an additional $20mn in reinsurance coverage. The coverage is set to be triggered when total claims from a cyber attack exceed $300mn.

Schultz compared what’s currently happening in the cyber space to where the property market was after Hurricane Andrew three decades ago.

“We're likely to get in the situation that we were in with property following Hurricane Andrew way back in the mid-90s, where all of a sudden the existing marketplace today just isn't large enough to support the demands for those looking to transfer this risk,” he explained.

But growth in the cyber market has a somewhat natural constraint owing to its potential correlation with other types of asset strategies.

“When you think about systemic cyber risk, it has a much higher potential of being correlated with equity markets,” said Schultz.

“As an example, if you were to see something significant that could affect public company valuations or even markets in general, then you would also have ILS that performs in a correlated way with that market.”

Cyber “has to grow”

Despite a few headwinds, Aon Securities still expects the market to grow, with demand being seen from (re)insurance companies, as well as directly from corporate clients that have inherently large cyber risks.

“Cyber has to grow,” Schultz said. “I think it has to grow given the macro factors of the cyber market, generally speaking, and I think ILS has to be part of that solution, so I would expect cyber to be larger in the next five years.”

Schultz noted that in some cases coverage may be restrictive, and to successfully innovate new solutions, it will be a case of looking for pioneering firms that want to co-develop the cyber market.

“From an Aon perspective, we're really going to need partners that have a vested interest to help us grow but also want to help create a new market, and so we're still having those conversations to find those right partners,” said Schultz.

Another key factor to developing the cyber market, according to Schultz, is having an independent model.

“If you're on the investor side, you like that independent view, because it's not like you don't trust the other view, you just want validation or confirmation that the risk is what the risk is. And so having that independence is an important step in developing the cyber capacity,” he said.

Watch the 10-minute interview with Aon Securities CEO Paul Schultz for the latest on how the cyber ILS market is developing.