Cyber insurance-linked securities

Abstract

Abstract We investigate the feasibility of cyber risk transfer through insurance-linked securities (ILS). On the investor side, we elicit the preferred characteristics of cyber ILS and the corresponding return expectations. We then estimate the cost of equity of insurers and compare it to the Rate on Line expected by investors to match demand and supply in the cyber ILS market. Our results show that cyber ILS will work for both cedents and investors if the cyber risk is sufficiently well understood. Thus, challenges related to cyber risk modeling need to be overcome before a meaningful cyber ILS market may emerge.