A trailblazer to creating ‘needed’ cyber ILS market

Hannover Re’s recent cyber ILS deal, using a proportional reinsurance structure to transfer cyber risk to capital markets investors, could become a template for further deals and help insurers to cope with burgeoning demand, says Henning Ludolphs of Hannover Re.

In January, Hannover Re, the third-largest reinsurer in the world, partnered with asset manager Stone Ridge to deliver the “first” proportional reinsurance structure designed to transfer cyber risk to capital markets investors.

Although technically not a true insurance-linked security (ILS), it did represent a massive breakthrough in moving risks of this type into the capital markets. Stone Ridge provided $100 million in capital to support an innovative retrocession tool that “for the first time” enabled the capital markets to participate directly in coverage of its cyber risks through a quota share cession.

The transaction covers cyber risks in Hannover Re’s worldwide portfolio and has a long-term orientation. The reinsurer noted in a statement at the time of the deal that it enabled it to reconcile the complexity of a proportional cyber risk cession with the needs of a capital markets investor.