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