Unleashing cyber’s growth potential
Howden Tiger’s Matthew Webb explains how the firm is aiming to provide a fresh alternative for cyber reinsurance buyers.
Cyber risk has been growing rapidly for a number of years, with a number of carriers active in the product line. This growth looks set to continue: we are forecasting global cyber insurance premiums to exceed $50bn by 2030 – a fourfold increase on the current level.
The reinsurance market will play a crucial role in unleashing the growth potential our clients are seeing in the direct market, which is why we are actively investing in our cyber reinsurance capabilities across broking, data, analytics and threat intelligence.
Facing up to uncertainty
One of the biggest challenges around cyber insurance is the scope of uncertainty. There is no equivalent of a hurricane season in the cyber world, but we can use models to analyse the impact of a systemic event and protect against it.
The best way we can face this uncertainty is by arming ourselves with as much knowledge as possible. This means enhancing data collection to support modelling, which in turn helps us to build effective controls and improve our underwriting. Tackling uncertainty will be key to attracting new capital.
Attracting new capital
The cyber market is currently concentrated, with just five reinsurers providing 65 percent of capacity, and for the most part, only rudimentary products are purchased such as quota share and aggregate excess of loss. This situation will need to change as adoption of cyber policies proliferates, and we are working to develop new solutions.
As the market evolves, we expect to see a reduction in proportional reinsurance purchases, with a shift towards non-proportional reinsurance and an increase in new products such as event excess of loss and catastrophe bonds.
We see ILS playing a larger role. From an investment perspective, introducing securities with cyber triggers could reduce the correlation of a portfolio to broader markets, as it enhances portfolio diversification.
Although cyber losses may correlate with broader economic losses in extreme scenarios, this correlation is far weaker than for most other fixed-income instruments. This is similar to extreme property cat scenarios so is not new to ILS investors and shouldn’t be a deterrent. Cyber ILS could also diversify an investor's broader ILS allocation, lowering their portfolio's internal correlation and consequently increasing its Sharpe ratio.
ILS markets are already active for cyber risks and there is huge scope for them to play a much larger role. The dedicated cyber team at Howden Tiger has pioneered new solutions such as the non-attritional event excess of loss product which compresses the tail, making it attractive to ILS markets due to its shorter duration than other non-proportional options. And, our capital markets team is also closely assessing options in the 144(a) cat bond market for cyber risk.
In such a fast-evolving area of risk the onus is on innovative structures and capital solutions – two areas in which we have a lot of experience.
Getting the message across
Exposure management is critical as it involves helping clients overcome the initial hurdle of understanding downside risk. The number one challenge flagged by our clients is where to set their underwriting tolerance for cyber risk and how to measure it. We have worked with numerous clients to address this challenge, focusing on refining a view of risk, overlaying reality of the limits being written and combining these with their financial strength. We can also give multiple views of risk using the leading model vendors and help clients design realistic disaster scenarios for their portfolios. The expertise we bring here will ensure that our clients can develop a sustainable view of risk on which to profitably grow their portfolio.
It’s a very exciting time to be on the broking side as the cyber market faces a capacity conundrum. Although the problem is not acute, as insurers are still finding capacity, at some point this is likely to change. Cyber as a product line will struggle unless it has reinsurance support, so it’s critical a wider market is created. We are creating that market.
Matthew Webb is executive director of cyber at Howden Tiger