Reinsurers showing increased cyber appetite ahead of 1.1
Cyber reinsurance capacity has increased while buying options continue to expand, with event covers emerging and even some alternative capital deals being done – but reinsurers will be keeping a close eye on cedants’ performance and systemic exposures at the upcoming renewals.
The cyber reinsurance market largely stabilised at 1.1.2023, according to Erica Davis, global co-head of cyber at Guy Carpenter. She noted that policyholders have improved risk controls.
“In terms of what that means as we exit mid-year 2023 and head to 1.1.2024, there is increased appetite in the reinsurance market,” she said. “Cyber has been viewed as a favourable trade in 2023, and we expect that to continue at 1.1.2024.”
Davis continued: “We are finding reinsurers receptive to the changes and improvements that cedants have made across their portfolio, not just with pricing but also with heightened technical acumen in the underwriting.”
Chris Storer, head of Munich Re’s cyber centre of excellence, global and North American reinsurance clients, identified two key themes ahead of the upcoming 1.1 cyber reinsurance renewals: performance, and the management of systemic risk.
“For this renewal, I think it's all about reconciling short-term performance, profitability, with longer-term sustainability,” he said. “I suspect Munich Re as well as other reinsurers will be quite eager to see how the market has performed over the course of 2023.”
Storer noted that the segment saw several years of pricing remediation in response to skyrocketing numbers of ransomware attacks, followed by better performance in 2022.
“In the meantime, we have observed some not insignificant rate decreases in the course of this year as [cedants] start to look towards growth again. But we've also heard reports of increases in frequency particularly around ransomware, as well as new loss trends like emerging privacy risks and third-party tracking tools,” he said.
Storer suggested that the focus on short-term performance needs to be balanced with ensuring this line of business “is really fit for purpose over the long term”.
“We've been quite noisy about the need to manage systemic exposure within cyber in the past, particularly what we would consider unmanageable systemic exposure like cyber war – a truly ruinous exposure that could really not only put Munich Re’s balance sheet at risk, but the whole industry at large,” he said.
Jonathan Spry, CEO of cyber MGA and modelling firm Envelop Risk, said clients are becoming increasingly sophisticated in the way they are looking to protect their accounts.
“We are seeing clients engage with us in detail to discuss the rating and claims environment, and are increasingly assisting clients with portfolio optimisation.”
On rates, Spry acknowledged primary pricing has been under pressure, but he predicted that this would stabilise in 2024, and said cedants also see value in partnering with reinsurers to manage their risk portfolios. “The increase in ransomware is under focus and has helped with rate stabilisation – we are also supplying threat intelligence to certain clients and are seeing a beneficial feedback loop emerging between the supply of data to us as a reinsurance partner and the use of data as a threat intelligence tool,” he explained.
War wordings and event definitions
Munich Re – the largest cyber reinsurer – stresses that clarity on cyber war wordings remains one of its top priorities.
“When it comes to cyber war, reinsurers will expect to see progress when it comes to the implementation of new and updated language in underlying policies. We have seen positive developments in the course of this year,” Storer said.
The executive said there have been “slightly different approaches” in London and the US around event definition.
“London has rather pushed a threshold-type approach in terms of determining what is a sizeable event that needs to be excluded,” he said. “We've seen the US rather go for a response-based approach. So slightly different ways of going about it, but ultimately trying to put a frame around this particular issue and I think all this has been very positive.
“I think we'll still see continued innovation in this space so we'd expect to see even more clauses, more iteration in the market. But what's most important is action. I think any market that chooses not to do anything in respect of cyber war is really running material risk at the moment.”
Munich Re this year led a pushback against the revised cyber war wordings being introduced by Marsh’s Echo facility.
As previously reported, Marsh is understood to have developed an amended wording to the recently agreed Lloyd’s Market Association war exclusions, with Munich Re believed to be concerned with attempts by the broker to redraw the boundaries of the cyber product to include certain aspects of conventional war.
“Our position hasn't changed in respect of Echo,” Storer said. “This is still an exposure that we do not have an appetite for.”
Discussing terms and conditions related to war, Guy Carpenter global co-head of cyber Anthony Cordonnier said that the key from a reinsurance broker’s perspective is for clients not to have any gap in coverage between the reinsurance cover they buy and the underlying policies that they underwrite.
“That is something we've been by and large able to secure under reinsurance treaties, mostly by our clients being very transparent with reinsurers on what their approach was,” he said.
His fellow cyber co-head Davis added that better clarity in cyber wordings about systemic risk is being seen across the industry.
“Guy Carpenter has certainly been working with clients for years now in regard to keeping reinsurers and cedants closely connected about the direction of war intent,” she said. “As we look towards 1.1 we intend to continue that work.”
Spry agreed, adding: “We believe general reinsurers are doing a good job in following the fortunes of the clients, while maintaining both discipline but some flexibility in war exclusions. The role of infrastructure exposure in coverage and appropriate aggregation and tail modelling also cannot be overlooked.”
A changed capacity landscape
Guy Carpenter’s Cordonnier said that the capacity landscape has changed over the past 12 months.
“Prior to that, we definitely saw a shortage of capacity as the market was growing massively and undergoing some challenges,” he said. “In the last 12 months actually that trend has reversed, with reinsurers growing appetite, terms and conditions stabilising, as we see signs of positive momentum building in the reinsurance market.”
Cordonnier believes there is potential for terms and conditions to improve at 1.1.2024, reflective of a positive environment following clients doing a lot of work on underwriting measures and performance improving.
The executive identifies three different “buckets” of reinsurers that Guy Carpenter is working with.
The first is significant players that have grown in the past couple of years and are providing more capacity. The second is those that are happy with their market share and will grow more or less in line with the market, which Cordonnier said “are not going to be a major driver of underlying growth going forward”.
“The third bucket is really the one that will support growth and move the needle in the next renewal cycle,” he said. “It is those players that are very small in, or even absent from the cyber market and have invested in hiring people as heads of cyber, bolstering their actuarial teams, signing up to cat models, and re-engaging with reinsurance brokers.”
Spry acknowledged the growing interest from reinsurers, but predicted that intelligent capacity would coalesce behind underwriters with proven resources and track records.
“The expertise, particularly in analytics and data science, required to adequately model cyber risk in aggregation and across portfolios will mean that capacity is likely to concentrate where expertise and advanced analytics are found. Take Envelop, for example – we are expecting to add a large handful of additional capacity providers to our panel in 2024, and conversations with potential new entrants are progressing very well.”
Looking ahead at Munich Re’s Storer said he expects reinsurance pricing to be “rather consistent” at the renewal.
“We hear reports of some new capacity but, of course, it's really questionable whether this is really sufficient to meet the further growing demand,” he said.
Storer said cyber is different to other traditional lines of business, as the exposure is growing and there is an opportunity to increase cyber penetration rates.
“We don't necessarily have a demand issue – it’s really being able to find the capacity to service that demand,” he said.
Guy Carpenter’s Davis noted that there have been 10 consecutive quarters of cyber rate increases on the insurance side, with the broker’s data showing a compounded increase of 182 percent since 2017.
“So while rate change has slowed in 2022 and there have been selective cases of rate being given back in 2023, we're working off of a much stronger foundation of pricing adequacy going forward,” she said.
Cordonnier noted that there may be some changes in structures as clients look at whether they are getting value for money.
Quota share is the predominant cyber reinsurance purchase currently, with stop-loss treaties the main non-proportional cover bought.
“Perhaps 18 months ago they would have been the only purchases available to clients,” Cordonnier said. “But now there are alternatives available, such as occurrence covers, that we are talking a lot about now. On the capacity front we’ve seen ILS markets entering the space, albeit in a selective fashion. All of that contributes to healthy discussions and clients having optionality.”
“Modest” impact of alternative capital so far
There is hope that alternative capital can increase capacity in the cyber market with a number of deals seen this year, including Beazley securing a $45mn cyber cat bond and Hannover Re securing capital markets cyber retro coverage through a quota share supported by $100mn of Stone Ridge capital. The Rendez-Vous has also seen the launch of a new loss index by CyberAcuView in partnership with Perils which, if it gains traction, could assist the development of a secondary market.
However, Storer said that “so far what we've seen has been rather modest, so I don't believe that this has really necessarily moved the needle in terms of the capacity in the market”. He noted issues with uncertainty around accumulation of extreme events and risk modelling.
Cordonnier said there has only been a handful of publicised alternative capital transactions so far.
“What we've seen a lot more is actually non-traditional players participating alongside traditional placements,” he said. “I think that will continue as that alternative capacity is being built alongside the traditional market. So I don't think we're going to see a non-traditional market sitting distinctly from the traditional market, at least for the time being.”
He added: “I think that those will work hand in hand maybe as top up capacity if needed. In the last 12 to 18 months market capacity has actually been fairly solid on the reinsurance side, and buyers have actually been pretty well served by the traditional market.”
Spry acknowledged that there was growing interest from alternative/ILS investors in the cyber space and predicted Envelop would be at the forefront in 2024. “We expect to deploy ILS capital into cyber reinsurance at the 1.1 renewals,” he explained.