Beazley’s cyber cat bond Cairney could upsize to $250mn “relatively quickly”

Beazley’s trailblazing cyber cat bond has the potential to grow to $250mn over the next four to five years as investor interest builds, predicts the carrier’s global head of cyber Paul Bantick, as it’s revealed the bond is named Cairney.

In an interview on The Insurer TV’s News in Focus programme Gallagher Re’s global head of cyber, Ian Newman, interviewed alongside Bantick, asserted that “there is no realistic limitation” on the cyber market’s growth, with its pioneering new bond to be a “launchpad for something much more meaningful.”

The interview followed Beazley’s launch of the industry’s first dedicated and tradeable cyber catastrophe bond.

The bond, which has secured $45mn of reinsurance coverage, is triggered when total claims from a cyber attack exceed $300mn.

The transaction was structured and placed by Gallagher Securities, the ILS arm of Gallagher Re, and is backed by investors including Connecticut-based specialist Fermat Capital Management.

Cyber modelling insurtech, CyberCube has also revealed its role as a modelling agent for the creation of the long-desired bond.

On the industry first, Beazley’s Bantick, said: “As we all know, we're on a journey from what is a $10bn market today to hopefully a $30bn+ market in the coming years. We always knew this would be one of the critical tools that we would really need as an industry going forward.”

“Getting the first tranche down was our first goal,” Bantick continued. “We always knew that we wanted to create the initial relationships and have something that we could grow over time.

“We've already got people giving us commitment they'd like to come on board early in Q1/Q2 this year, so there's already a number of investors that have already shown a great amount of interest in being involved, which we're already planning for and that would be phenomenal.

"If we're looking at this with a four to five year view, we could get this to a quarter of a billion dollars relatively quickly,” he said.

Beazley - Lloyd’s largest insurer - is a leading cyber carrier, having grown its book by 66 percent to $838mn during the first nine months of 2022, with more growth expected in the year ahead.

Beazley’s cyber exposures are dominated by the US, which as of last year represented 79 percent of the portfolio, with Europe representing 13 percent and all other regions the remaining 8 percent. The premium base is broadly diversified across multiple industries.

The cyber market saw a period of elevated frequency and severity in ransomware claims during 2020 and 2021, which prompted a retrenchment in capacity with the cost of cover rising sharply.

Several carriers, including Beazley, took steps to re-underwrite their cyber portfolios as a result.

Challenge to make investors comfortable

Both Bantick and Newman underlined how the main challenge for the new product was convincing investors to initially invest.

“This is a new frontier for the ILS market and a real potential for [investors]. At the same time, investors are not that comfortable and it's very difficult to get investors comfortable if there isn't a trade out there,” said Newman.

Bantick added: “We spent a lot of time talking to [investors] on where we see the market going, how we will continue to manage and iterate systemic risk, catastrophic cyber cover and how we give that to clients.”

Bantick suggested one of the main selling points was ensuring investors could “understand this is not something we necessarily had to do today, but it is something for the future.”

For overall cyber industry growth, capital allocation must be efficient

The interview concluded with a warning that the main barrier to the cyber industry’s growth was if the industry failed to distribute capital efficiently.

“Whilst the rated market is going to remain absolutely crucial and be the majority of it, we are going to need third party capital of some shape or form,” said Newman.

Indeed, the need for capital injection for growth is critical as the cyber market functions in a unique way with “no real realistic limitation to how much we can grow.”

Newman added: “It is a question of the development of the distribution and development of the products in order to be able to get that to a broad audience. I think this [capital] is a crucial step in making this happen.”

Bantick underlined that the bond is now a vital tool in the future development of the cyber industry.

“There's certain events like war that are too big for any line of insurance to consume and that will always be the case. What we need to be able to do is meet that rising demand with broad cover and help address their needs, and I think this is going to be a critical tool,” he said.

“We're hopeful that this won’t just be about Beazley. This is about helping the market get access to these sorts of things going forward,” Bantick concluded.

Watch the full 15-minute interview with Beazley’s Paul Bantick and Gallagher Re’s Ian Newman for more insight into:

  • The first private cyber cat bond - creating a blueprint for others
  • Turning cautious investors in the bond’s favour
  • The bond’s expected growth potential
  • Challenges facing the future of the cyber market