The cyber liability reinsurance market is still limited, but more capacity is expected to enter the sector, albeit slowly and cautiously, from both traditional reinsurers and third-party capital sources.
Measures to manage cyber security risk that are encouraged by insurance companies lead to improved results for cedants, which makes the risks more attractive to reinsurers, observers say.
While policyholders continue to face higher cyber rates and tougher conditions, measures such as multifactor authentication and offline backup are starting to result in better loss rates.
According to Moody’s Investor Service, the sector’s loss ratio improved to 62% in 2021 from 65% in 2020.
Losses of ransomware have been an important factor behind the reduction in capacity.
“The (reinsurance) supply met the demand until two years ago, and ransomware just turned off the taps from the supply, so … we ran out of gas pretty quickly,”; said Patrick Bousfield, a senior broker with Lockton Re (Bermuda) Ltd ., a unit in Lockton Cos. LLC.
Tom Gamble, New York-based vice president and global distribution manager for program manager Resilience Insurance Cyber Solutions, said that even though the company’s agreement was renewed this year, “it was not without a lot of work and a lot more issues than I think, in my 30 years I’ve ever been through reinsurance renewals. ”
Michael Dion, Moody’s vice president and senior analyst, said that the cyber reinsurance market is in transition, with interest rates rising for insurance and reinsurance, but the losses level off as a direct result of the industry’s success in implementing risk management measures.
“The insurance market has largely driven this change” by policyholders improving their cybersecurity practices, which has led to a reduction in the rate of ransomware loss, says DJ Ruhlman, New York-based vice president of RT ProExec, a division of RT Specialty LLC .
Experts say that concerns about systemic risks, ransomware, lack of data loss, the complexity of modeling cyber risks, pricing and profitability, are among the factors that had fueled doubts about involvement in the cyber reinsurance market.
The cyber reinsurance market is likely to see more traditional and non-traditional players, including third-party capital providers, says Ian Newman, London-based global cyber director for Gallagher Re, the reinsurance brokerage unit at Arthur J. Gallagher & Co.
“We will certainly need, at some point, more capacity,” said Michael Hauner, Munich-based senior insurer at Munich Reinsurance Co.’s cyber center of excellence. “We will have to enter the capital markets sometime in the next two or three years.”
The cyber reinsurance market “would benefit from the development of a wider ILS market”, which can also be supported by government risk pools, says Manuel Adam, Frankfurt, Germany-based Deputy Director, EMEA Financial Services, for Standard & Poor’s Corp.
Recent moves to a claims-based structure for cyber insurance contracts, which have shortened the exposure tail, could make the reinsurance market more attractive to ILS providers, he said.
Kate Nattrass, London-based partner, contract reinsurance for McGill & Partners Ltd., said that demand, especially for proportional reinsurance, is still greater than supply. “But where there is demand, there is an opportunity for new products to be developed,” she said.
Erica Davis, CEO, Global Co-Head of Cyber, for Reinsurance Broker Guy Carpenter & Co. LLC, said: “We work a lot with reinsurers” to help them grow their cyber business and acquire new capacity with cyber reinsurers.
Davis said that Guy Carpenter is working to educate the new players about the risk, the improved state of the market and why headline events alone are not enough to inform the appetite for cyber risk.
“Guy Carpenter is also working on new sources of capital because we feel that this risk is growing so dramatically that traditional capacity will not be enough” to keep pace with market growth, she said.
Phil Edmundson, founder and CEO of Boston-based Corvus Insurance Holdings Inc., an insurtech managing general underwriter, said there is so much growth potential that “it’s simply too good a market opportunity to miss out on.”