Potential for risk diversification in cyber ILS and cat bond market: CyberCube

An analysis of all the 144A cyber catastrophe bonds issued to date shows that diversification within cyber as an asset class is possible despite systemic cyber events not accumulating across easily visualized fault lines, risk modelling firm CyberCube has indicated. 

Nearly $415 million in 144A cyber catastrophe bonds were issued in the last quarter of 2023, including AXIS, Beazley, Swiss Re. CyberCube whitepaper examined the specific characteristics of the four 144A cyber catastrophe bonds issued in Q4 and the potential correlation between them.

The whitepaper titled “Digital Ties and Natural Divides: Correlation and Diversification in Cyber Catastrophe Bonds” addressed a notable concern amongst investors regarding the presumed potential of a high correlation between issuances. For its analysis, CyberCube’s probabilistic cyber catastrophe model Portfolio Manager ran 50,000 simulation years to create the overall event set of potential systemic cyber events.

The whitepaper concludes the 144A bonds issued to date provide a solid base for future innovation. It aims to provide investors with more comfort that there is diversification to be found within the nascent cyber insurance-linked securities (ILS) market.

Brittany Baker, CyberCube’s head of solution consulting, said: “The research leverages CyberCube’s unique position as the only modeling vendor to have worked with all sponsors to provide an expert view of risk for all the 144A cyber catastrophe bonds that have gone to market to date. By going beyond a surface-level analysis of potential systemic cyber losses, we hope this whitepaper enables investors to understand the diversification potential between bonds within this new asset class.”

Jonathan Choi, CyberCube’s director of insurance risk consulting, said: “Today, the cyber catastrophe bonds that have gone to market cover a wide array of cyber risks under a single umbrella, mirroring the early days of the natural catastrophe bond market before it evolved to cover specific perils like earthquakes, hurricanes, and floods. As the cyber (re)insurance market continues to mature, more nuanced approaches to managing systemic cyber risk will surface, unlocking innovative strategies for the transfer of cyber risk.” 

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