Double Whammy? Examining the Correlation Between Major Cyber Events and Broad Market Performance

In Guy Carpenter’s report, Through the Looking Glass: Interrogating the Key Numbers Behind Today’s Cyber Market, published in June 2023, we highlighted the importance of unlocking reinsurance capacity to fuel cyber market growth. Providers of alternative capital by way of insurance-linked securities (ILS) products are key sources of potential additional capacity.

However, despite the rapid expansion of cyber insurance market, ILS funds have been slow to enter the space. ILS investors’ concerns around cyber insurance are two-fold: the relative nascency of commercial cyber models that poses a challenge to risk quantification, and the perceived correlation between cyber events and stock market performance.

As cyber catastrophe models are approaching a point of maturity and sophistication, their outputs are being increasingly relied upon by traditional reinsurers and alternative capital investors. Guy Carpenter’s subsequent report, Under the Lens: Investigating Cyber Vendor Model Divergence, applies advanced predictive analytics to investigate the key drivers of cyber catastrophe model differences. That study aims to provide a level of comfort to cyber market participants in constructing their own views of exposure accumulation as their book of business expands and evolves.

This report addresses ILS funds’ other concern around correlation between cyber events and the performance of the equity market, which, in turn, drives the performance of their investment portfolios. There is a long-held skepticism among the investment community that when a systemic cyber catastrophe event happens, it would result in a wide-ranging stock market downturn, since such an attack tends to be indiscriminate, and its victims would span across the entire economy. Many ILS funds are reluctant to deploy capital in cyber transactions for the fear of a “double-whammy” situation in the immediate aftermath of a widespread cyber attack.

In this report, a joint effort between the Guy Carpenter and Marsh McLennan Cyber Risk Intelligence Center teams, we evaluate extensive industry and academic research to demonstrate the lack of correlation between any observable historical cyber events and stock market performance. Our goals are to address ILS investors’ concerns around the “double-whammy” situation and to provide investors and the broader insurance community with the data-driven support to make an informed decision about capacity deployment.