Despite the recent material inflow of capacity into the market, cyber (re)insurance’s greatest challenge lies in attracting sufficient levels of capital, says Gallagher Re, global reinsurance broker, in a newly released white paper.
Gallagher Re says in the paper, titled “The Vital Role of Capital in Cyber (Re)Insurance”, that over-capitalisation will never quite exist in cyber (re)insurance. The question is who will contribute to, and benefit from, attracting new capital to unlock Cyber’s full potential.
The winners will be those underwriters who combine capital and technology, along with the ability to use data effectively, says the paper.
Citing factors that will foster Cyber’s growth into one of the most significant classes of (re)insurance business, the paper states that the underlying dynamics of cyber (re)insurance are materially different from other underwriting classes because of growth opportunity. The customer base, both in terms of developing new products and expanding into new territories, is broadening.
More stringent underwriting, portfolio optimisation, and better use of technology have improved performance.
Why increased capital stimulates growth (rather than the softening of terms)
Gallagher Re believes the underlying dynamics of the cyber (re)insurance market are materially different from all other underwriting classes, in that a wave of additional capacity would not create a sustained softening in the same way as would be seen in other lines of business.
Swift, wholesale, and corrective action was taken market-wide to counter ransomware losses that arose in the 2019 and 2020 underwriting years. The improvements in portfolio performance as a result of rate rises, more stringent underwriting, portfolio optimisation, and more effective use of technology have resulted in a greater number of carriers looking to take on additional cyber exposure and premium.
This increased appetite is likely to intensify as is seen from the cumulative impact of these changes track through in the claims development triangles over the coming quarters which, in turn, will attract a further influx of capacity. (In the short term, however, this influx of capacity could put downward pressure on pricing and coverage in the cyber (re)insurance chain.)
In the last few years, innovation has been stymied in what has, in its short history, been a very creative class of business. The market has been focused on remediating ransomware losses and carriers have been able to achieve their subsequent premium plan targets from underlying rate rises alone, while keeping aggregates flat. This distraction led to a stagnation in product offering and a curb on intended territorial expansion However, as rate increases decelerated, this dynamic diminished as a means to achieving top-line growth.
Gallagher Re now expects to see the market pivot to attract a broader customer base, both in terms of developing new products and expanding into new territories where penetration rates are low and demand for cyber (re)insurance cover is ever-increasing.
For the market to achieve this, it requires a combination of innovation within rated carriers as well as support for MGAs. As a result, aggregates and tolerances will need to increase — and more capital will be required to support this increased demand. This stimulation in growth and profitability will likely attract further investment, in turn compounding further growth.
Coupled with an ever-increasing digitised world and the growing dependence on cyber insurance and its associated cybersecurity services, the cyber (re)insurance market (having already demonstrated with its response to ransomware losses) will have the ability to pivot faster and more effectively than most insurance lines of business, in the event of any significant deterioration in performance.
Reinsurance
In the insurance space, there is currently a huge reliance on third-party capital with close to 50% of all premium written being ceded to the reinsurance community, predominantly on a proportional basis.
As portfolios grow, and insurers’ comfort levels rise, provided insurers are adequately capitalised, these percentage levels of cession are likely to decrease. But whilst relatively less premium and exposure may be proportionally passed over to other carriers, on an absolute basis the ceded amounts will continue to rise rapidly as the market grows. Carriers will therefore need to continue to find new forms of capital to protect the tail risk and reduce their capital loadings. This will also be applicable to reinsurers, as they look to grow in line with their clients’ needs.
