Advances in the modeling of cyber exposures were the main drivers enabling the emergence of capital market capacity to support cyber exposures, according to experts.
Just as the traditional disaster bond market relies heavily on models to evaluate risks and exposures, cyber models have improved and are being used more widely to evaluate cyber exposure for potential capital markets coverage, sources said.
Models played an important role in recent cyber transactions by Beazley PLC and Hannover Re SE by providing a fundamental view of risk, said Juan Marcano, principal, alternative venture capital, in London for CyberCube Analytics Inc.
“A significant part of getting these trades over the line was getting investors comfortable with their exposure, which requires the use of models to understand potential outcomes,”; he said.
The models are improving, but development continues, sources say.
“Cyber modeling is constantly improving, and the market’s first cyber cat bond shows growing confidence in the modeling approach,” said Theo Norris, cyber account manager, insurance-related securities, in London for Gallagher Re. However, he added that “we’re not hiding from the fact that cybercat modeling is more nascent and not yet really tested by an event.”
“The number of insurance companies using cyber models is growing rapidly as the credibility of the models has matured,” said Oliver Brew, London-based cyber practice leader, Lockton Re, a unit of Lockton Cos. LLC. Model development is a process of “constant improvement,” he said.
Parametrix Insurance Services LLC, which provides index-based cloud computing downtime insurance coverage, sees a role for its models and capabilities in the cyber ILS space, said Sharon Haran, Tel Aviv, Israel-based commercial director at the company.
The basic calculations and quantifications involved in transferring a client’s cyber risk to Parametrix could be adapted to an insurer or reinsurer looking to transfer cyber exposure to the capital markets, Haran said. Parametrix’s other cloud monitoring and technology operations also fit or could be aligned, he said.