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Insurance Linked Securities - Cyber Risk and the Capital Markets

April 2016
Paul Traynor   |   Pensions and Insurance Segments Leader, International, BNY Mellon
Daniel Crisp   |   Global Chief Information Risk Officer and Head of IT Risk Compliance, BNY Mellon
Robert Wagstaff   |   Managing Director and Group Head, Corporate Trust, UK Sales and Relationship Management, BNY Mellon
Caroline Cruickshank   |   Managing Director, Corporate Trust Strategy, BNY Mellon
Karin Mulvihill   |   Head of Technology, Compliance and Public Advocacy, BNY Mellon

Maintaining London’s competitiveness in the insurance market requires an innovative approach to overcome cost and regulatory challenges – cyber catastrophe bonds could be a solution to attract new investment and drive growth.

Key Highlights

  • An onshore Insurance Linked Securities (ILS) centre in London will facilitate innovation, particularly in the development of risk transfer products for emerging risks such as cyber.
  • The ability to transfer emerging risks to the capital markets rests on the ability to understand, model and parameterise the peril.
  • If a solution can be found for cyber it will set a precedent for other emerging risks, including pandemic and emerging market natural catastrophe, among others.


In March 2016, the UK’s HM Treasury published an “Insurance Linked Securities: Consultation”. In BNY Mellon’s response to the consultation we share our views on how Insurance Linked Securities (ILS) vehicles can be attracted into the London market.

Specifically, it is our view that an onshore ILS centre in London will support innovation, bringing the vast depth, knowledge and tools of the capital markets to support the transfer of catastrophic emerging risks.

This whitepaper, which we are releasing in conjunction with our consultation response, considers the potential of a cyber catastrophe bond. The capital markets is the natural home for the catastrophic elements of a cyber attack. Performing such a feat and successfully securitising this peril will facilitate further growth and maturation of the cyber insurance market. READ WHOLE FOREWORD

Paul Traynor, Pensions and Insurance Segments Leader, International, BNY Mellon

The Evolution of Insurance Linked Securities

ILS is a broad term that represents the transfer of insurance risk to the capital markets. Over the past decade, the market for ILS has grown substantially, with pension funds and other institutional investors attracted to ILS post-financial crisis as a non-correlating asset class that was outperforming traditional investments in the low interest rate environment.

  • Today, overall aggregate non-life ILS capital, or alternative capital, is around $72bn1. Of that total, catastrophe bonds finished the year with $26bn of outstanding market volume.
  • There is an acceptance that the ILS market, or alternative reinsurance market, is now here to stay. However, the influx of capital from non-traditional players has increased competition, exerting downward pressure on reinsurance and retrocessional pricing.


An Innovating Asset Class

While peak zone natural catastrophe (“nat cat”) risks continue to dominate the cat bond space, there has been a gradual transition beyond nat cat to life, accident and health as well as casualty risks.

  • It is clear from recent cat bond deals that investors are hungry for new and diversifying risks.
  • Another innovation within the cat bond space has been the growth of cat bond lite structures.
    • The ability of cat bond lite transactions to allow sponsors to complete smaller, more targeted transactions quickly, while managing the cost of capital, is clearly becoming more attractive.
    • The structure also enables more participants to enter the ILS sector, opening up the market to a broader investor base. Such transactions could work well in the London market, particularly as new and emerging risks are securitised for the first time.


A Case Study: Cyber Terrorism

The ability of cyber terrorists to target national infrastructure, power grids and other critical assets is a real and growing threat.

It is in this space – where cyber risk becomes catastrophic – that the capital markets could potentially play an important role.

“Cyber terrorism is now seen as a new domain of warfare and it’s recognised as a warfare domain along with land, air and water. This threat pervades everything. It has the ability to disrupt our power systems, it goes to our finances, and indeed even to our identity."

Karin Mulvihill, Head of Technology and Compliance, BNY Mellon


An ILS Centre in London

The 320-year-old London insurance market – with Lloyd’s of London at its centre – has a long history of commercial and specialty insurance. Market commentators have recognised the need to maintain London’s competitiveness going forward, by increasing business efficiency, reducing the cost of transacting the business and continuing to innovate.

ILS London: Three Key Ingredients for Success

  1. Tax incentives for SPVs to locate in London, similar to those offered in offshore ILS centres such as Bermuda and Guernsey;
  2. A dedicated unit within the PRA to develop close ties between the regulator and ILS community that will enable swift approvals for new SPVs and other ILS instruments
  3. London must leverage its expertise within specialty markets and position within Europe to offer the ILS market something different.



  • London is well placed to develop as an ILS centre of excellence for emerging and specialty risks.
  • Cyber risk is one of the fastest-growing exposures faced by the corporate world, with a prediction the market could grow to $25bn by 2025.
  • The capital markets is the logical place for catastrophic emerging risks, however further work is needed in aggregating and modelling the risk.



1 http://www.willis.com/documents/publications/Services/WCMA/WCMA_January_2016_ILS%20Market_Update.pdf – ILS Market Update January 2016 – Willis Capital Markets & Advisory


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