London-based insurance company Beazley said it is launching the first cyber catastrophe bond, as concerns grow in the industry about the increasing financial fallout from cyberattacks.
Under the arrangement, the $45 million bond will pay out to Beazley if a cyberattack costs its clients more than $300 million. Absent such an event, Beazley will make interest payments to the bond’s investors, which include Fermat Capital Management, and will eventually return the principal on the loans.
Such insurance-linked securities (ILS) have been used in the insurance industry to mitigate liability for catastrophic events like flooding or wildfires, but they are a first for the growing cyber industry.
In an announcement published on its website, Beazley explained: “The bond is designed to cover remote probability catastrophic and systemic events.”
Tom Johansmeyer, senior vice president of Property Claim Services at Verisk, told The Record that he expects the ILS model will be replicated in the cyber insurance industry, but “on a small scale,” as the fallout from Hurricane Ian continues to put a damper on the traditional catastrophic bond market.
“That’s where the completion of this bond is most impressive. They were able to get ILS players to commit to a first trade for a new and emerging class of business when it would have been much easier to go with what they know. That sort of courageous thinking is what needs to be replicated more than anything else,” Johansmeyer said.
The announcement of the catastrophe bond follows comments made by the head of the insurer Zurich, who recently told Financial Times that the scale and frequency of cyberattacks were making such incidents “uninsurable.”
Cyber insurance premiums have been rising as losses have skyrocketed, with costs for coverage up 28% in the first quarter of 2022 year-on-year. Meanwhile, the number of payments flagged by U.S. banks as related to ransomware nearly tripled in 2021, to $1.2 billion.
Given escalating prices, concerns have been raised that cyber coverage may be out of reach for smaller businesses.
John Seo, managing director at Fermat Capital Management, said in the release that the firm had been eyeing such an investment for several years.
“We believe this deal marks an important step in unlocking capital market investment into cyber risk and creates a solid foundation for a future cyber ILS market,” he said.