By Michael Loney

Feb 3 - (The Insurer) - The cyber ILS market will grow through refining contract terms, addressing pricing uncertainties, and expanding product offerings, according to a Gallagher Securities report.

In a new report, Gallagher Securities noted that more than $750mn of capital has now been deployed in underwriting 144A catastrophe bonds alone and it highlighted the “increasing visibility of the peril within the ILS investor community”.

“Cyber ILS is becoming a viable tool for underwriters seeking to manage systemic risks and expand capacity,” the report said.

Gallagher Securities said the cyber insurance market is expected to more than double in the next decade and ILS will expand the pool of available capital to support this growth.

ILS also enhances cyber market resilience by providing essential alternative capital during systemic cyber events.

“As the cyber insurance market expands, demand for cyber ILS is expected to grow, attracting further issuances from both new and existing participants. To access these opportunities effectively, sponsors will require specialized expertise in cyber risk, securitization, and structuring,” the report said.

Gallagher Securities noted the growth of the cyber ILS market, which it said began with the broker placing the first collateralized deal for cyber in January 2017 in a transaction that involved a single ILS investor.

The first agency-placed cyber cat bond was issued in January 2023. The Cairney I, II and III transactions in 2023 were sponsored by Beazley and placed by Gallagher Re, and introduced scalable cat bond lite structures tailored to institutional investors.

This was followed by the first underwritten Rule 144A cyber cat bonds around January 2024, with four cat bonds issued using a range of indemnity and industry-loss triggers, with a cumulative limit of $415mn.

Most recently, Beazley’s PoleStar 2024–3 became the largest cyber cat bond to date, securing $210mn. The report said this deal highlighted “the strong ILS investor appetite for cyber risk”.

Also last year Gallagher Re placed the third and largest cyber ILW, in a deal that also involved Beazley and sourced $290mn of limit.

Gallagher Securities said that the cyber ILS market “remains in its nascent stages, but significant progress has been achieved through several key issuances”.

“These pioneering transactions have underscored the potential of ILS to become a core component of cyber underwriters’ reinsurance strategies,” the report said.

Pricing dynamics similar to peak US cat risks

Gallagher Securities said that the pricing dynamics of cyber ILS are currently like those of peak US catastrophe risks, carrying a risk-to-spread multiple of 4.6. The risk interest spreads reflect the perceived uncertainty and novelty of the peril.

“However, the broader ambition is to reduce this innovation premium over time, bringing it to a level where it remains competitive with rated markets,” the report said. “This would help attract more sponsors to the space, providing investors with increased opportunities to diversify their portfolios across different geographies, product lines, and risk appetites.”

The number of investors in the space has grown as momentum has been generated by issuances so far and by advancements in modelling and increased education about evolving threats.

“With a growing pool of investors and deployed capital, the cyber ILS market is poised for further growth, marking a new chapter in the evolution of alternative capital solutions for the cyber insurance sector.

Gallagher Securities suggested that refining contract terms, addressing pricing uncertainties, and expanding product offerings will be critical in enabling the market to unlock its full potential.

“Advances in cyber risk modeling and data analytics are driving a growing consensus around terms and conditions in cyber ILS contracts,” the report said. “This progress is enabling sponsors and investors to align more effectively on clear and adaptable contract structures that address the unique characteristics of cyber perils, such as ransomware, data breaches, and systemic cloud outages.

“With each step forward, contracts are becoming more precise in defining triggers, exclusions, and coverage, reducing ambiguities and enhancing market confidence.”

Gallagher Securities said that cyber ILS adopters have borne the weight of an “innovation premium” as investors navigated hesitancy toward cyber risk due to limited historical experience and an incomplete understanding of the peril.

“Over time, the accumulation of empirical data and the development of more robust risk models have, and will continue to, alleviate these concerns, enabling more precise assessments of cyber exposures,” the report said, adding that high-profile incidents such as the CrowdStrike event have also provided “valuable insights into how cyber risks manifest in practice”.

The cyber ILS market continues to diversify, with an expanding range of products designed to meet the evolving needs of sponsors and investors, Gallagher Securities continued.

The development of new solutions is expected to play a critical role in supporting the cyber market’s future growth, including sidecars, “which have already started to be successfully deployed in the cyberspace”, it said.

“By allowing third-party investors to assume a portion of an insurer’s cyber risk portfolio, sidecars offer a scalable mechanism to bring additional capacity into cyber risk programs. As the sidecar market grows, it will provide insurers and reinsurers with greater flexibility in managing capital, while enabling investors to selectively align their participation with specific risk appetites,” the report said.

The development of aggregate protections will also be “particularly valuable” in addressing systemic risks, Gallagher Securities said.

The report concluded: “The continued maturation of the cyber ILS market will depend on several converging factors: the refinement of terms and conditions, the reduction of pricing uncertainties, and innovation.”

As Cyber Risk Insurer has previously reported, the cyber cat bond market now stands at $785mn of bonds outstanding across six distinct transactions and four sponsors. However, no new deals were placed around the 1.1.2025 reinsurance renewals.

Jasper Goring, head of cyber reinsurance – North America at Gallagher Re, told this publication in January that there remains “a very strong interest from buyers in what cat bonds can do for them”.

“There is unquestionably more growth to come, both in terms of the number of bonds that can be placed and the amount of cat bond limit that's available to a cedant,” he said. “Yet for the vast majority of clients, there is enough rated reinsurance to be able to meet their needs. It is only the very biggest treaties that have really felt a need to go out and diversify their capital pool.”