Cyber & Parametric ILS gain momentum as cat bond market evolves: AM Best
The insurance-linked securities (ILS) market is continuing to evolve beyond traditional catastrophe bonds, with growing issuance in cyber and parametric segments, reflecting efforts to close protection gaps and provide alternative risk transfer solutions, according to a new report from AM Best.
While indemnity-based catastrophe bonds still heavily dominate the market, AM Best highlights the rising use of parametric structures, particularly as cedents seek alternatives for risks that are difficult to place in the traditional reinsurance market.
In its latest ILS Market report, AM Best noted that the use of parametric triggers in 144A cat bonds is still modest at this point, with most primary insurer sponsors showing a strong preference for indemnity covers.
However, in the broader reinsurance market, the greater availability of capacity in 2024 over 2023 meant that indemnity cover was more attainable.
“Nonetheless, issuance of 144A parametric cat bonds grew to USD 1,400 million in 2024, from USD 600 million in 2023,” AM Best explained.
Adding: “The ILS market has seen further momentum for parametric covers. Parametric covers are likely to be used when indemnity cover is not widely available or simply doesn’t fit the needs of the cedent.
“Cedents have had a more difficult time placing aggregate cover for frequency-driven risks and are increasingly interested in parametrics as a solution. Parametric covers are being used to chip away at the global protection gap between economic losses and insured losses attributable to natural catastrophes. Some of that gap stems from deductibles and sub-limits on indemnity covers, and parametrics can be used to fill some of those gaps.”
Moreover, the agency also states how government-backed entities are the most notable sponsors of parametric 144A catastrophe bonds, often through the World Bank.
“The government cedents especially like the speed of payout to put money to work on recovery efforts quickly. Government sponsors also make use of other forms of parametric reinsurance, such as the cover provided by regional parametric risk pools like the Caribbean Catastrophe Risk Insurance Facility or the Southeast Asia Disaster Risk Insurance Facility,” AM Best added.
The agency also explains that ILS managers “remain on the lookout” for further ways to build out the ILS market and give investors more ways to participate in the asset class, noting that parametric insurance is viewed as a way to meet that objective.
“These covers may provide investors with access to other perils that have been more difficult to place in indemnity form. Flood and severe convective storms are two perils that have been a focus for parametric covers; business interruption is another,” AM Best explains.
Another emerging segment within the ILS market is cyber risk, which continued to gain momentum in 2024.
The market saw significant growth in cyber cat bond issuance, led by Beazley’s expansion of its Polestar Re program, which added $370 million in new issuance across two tranches (Series 2024-2 and Series 2024-3).
By the end of 2024, the total 144A cyber cat bond market had grown to nearly $800 million, with Beazley also securing $290 million in additional coverage through a cyber industry loss warranty (ILW).
“The outstanding cyber cat bonds appear to have emerged unscathed from the CrowdStrike incident, which serves as a useful point of discussion to home in on precisely which exposures are covered and, in this case, to what extent accidental, non-malicious cyber incidents are covered. Coverage terms are still being refined to narrow the scope of coverage. To that end, clear definitions and contract wording will be crucial,” AM Best said.
The agency also highlights that with improved modeling and understanding of potential cyber loss scenarios, further deals are expected, and the cyber catastrophe bond market is expected to grow in 2025 and beyond.
You can read about every cyber cat bond transaction, including the first private cat bond deals and the more recent 144A cyber cat bonds, by filtering our Deal Directory by peril to view only cyber cat bond transactions.
As the ILS market continues to diversify beyond traditional catastrophe risk, parametric and cyber bonds are playing an increasingly important role in providing efficient and scalable risk transfer solutions.
