Twelve’s Morris: Cyber to become bigger part of cat bond market

Capital market support for cyber risks is set to grow following the emergence of the first cyber cat bonds, with Twelve Capital’s head of ILS analytics Rhodri Morris predicting the class will become a more significant part of the cat bond market in the future.

Speaking to The Insurer TV, Morris attributed the emergence of cyber cat bonds to current market forces, with a lack of retro capacity expected to support further expansion of the market.

“Cyber is here – it will continue to grow, and at some point it will become a much bigger part of the cat bond market,” he said.

During the interview, Morris highlighted that the cyber market needs capital market support to grow.

“Insurance companies will reach a limit of what they're happy to cover with cyber insurance, they then pass that on to reinsurers and now we've got to the point where a lot of reinsurance companies are full on the amount of cyber capacity that they can take.

“There isn't, at the moment, a retro or further level to pass on to,” he said.

“These efforts to get cyber into the capital markets via catastrophe bonds ultimately mean that these companies can grow and write more cyber insurance.”

He said views among investors remain mixed as to the extent to which cyber is correlated to wider financial markets.

“The selling point of ILS in general is that it is non-correlating – earthquakes have nothing to do with the price of gold, or how a tech stock moves.”

Morris said cyber cat bonds being tied to the markets was a problem when it came to investors figuring out how to fit them into their portfolios.

“If you imagine a lot of our investors are traditionally invested in sort of equities, bonds and things like that, if they're then sort of taking on cyber risk as well – cyber is great but is it uncorrelated?” Morris questioned.

“We go and talk to those clients to discuss the pros and cons, risks and uncertainties, to determine whether they are interested.”

Cat bonds fill retro gap

This year has seen a boom in cat bond activity, with Morris highlighting that bonds have helped fill a lack of capacity in the retrocessional market.

“We saw at 1.1 last year a very hard retrocession, and particularly, reinsurance market that continued throughout the year, primarily driven by Hurricane Ian.

“At certain levels, we're seeing the catastrophe bond protection being purchased is overlapping quite heavily with companies' retrocession purchases. It then becomes more of a strategic play of where do you want to buy one versus another.”

One benefit, according to Morris, of seeking retro or reinsurance in the capital markets was that it is cheaper than traditional cover.

“You might be able to pay slightly less in the capital markets [for retro or reinsurance cover] than you would for a rated paper.”

However, Morris does not see cat bonds and traditional reinsurance as like-for-like swaps, as they have some key structural differences such as length of cover.

“But you know, [with cat bonds rather than retro or reinsurance cover], you're locking in that protection for three years, rather than your traditional one-year cover.”