If fortune favors the brave, trepidation in the insurance-linked securities market may be dampening investor profits.
Executive SummaryOpinion: Cowbell Cyber's Dan Palardy and Envelop Risk's Anjali Dharma-Wardana's argue that ILS investors are being too timid when it comes to cyber risk. Here, they compare cyber and natural catastrophe risks, suggesting a shift in focus from the interconnected potential for loss in the cyber world to the interconnected potential for loss mitigation and prevention—a potential they believe translates directly to a more insurable type of catastrophe risk.
Recent outlier losses in the property-catastrophe market have left ILS investors reeling, and trapped collateral may be clouding the better judgment of those who bear the catastrophe risk. It also has unfairly delayed cyber-ILS adoption, as investors perceive failures within the property ILS market as rationale for missing the opportunity in cyber—worse yet, failing to recognize the caliber of cyber risk as a quantifiable and insurable peril.
For years, the cyber peril has been rejected by the capital markets for its perceived unpredictability. The most glaring difference between the risk quantification of cyber vs. natural catastrophes, however, is precisely what makes it easier to predict: Cyber is an anthropogenic peril, while hurricanes are destructive without prejudice. Almost all cyber threats follow known incentives. These threats can be viewed upon a motivation matrix—usually financial, sometimes political and always predictable. Targets of a possible hacktivist group are identifiable; so, too, are the critical infrastructure, government entities and key businesses they target. To that effect, while storm paths do congregate in certain areas, Florida’s political, economic or cultural posturing, though unique, have no influence on the formation of the storm. These sorts of motivations can be navigated and predicted; their levels of randomness pale in comparison to the storms that wreak havoc on the Atlantic coast annually.