The Big Question: How are reinsurers approaching cyber risk in the run up to the Monte Carlo Rendezvous? With Daniel Carr, head of Cyber, Ariel Re

The demand for cyber insurance shows little sign of slowing down and the market is faced with finding the capacity to match that momentum.

The opportunities are significant if the market is to be believed: broker Howden says the size of the market could reach US$50 billion by 2030, adding that this potential is tied to three key factors: distribution, tail-risk management and attracting capital.

It is the final two of those three factors which are testing the market, however. The flood of ransomware claims over the past three years, and the rising state-backed threats which have been witnessed in recent months – many driven by the Russian invasion of Ukraine – have tested the market’s appetite given the potential scale of the exposure the class can create.

Those concerns have also seen the debate over capital continue. Reinsurance has a huge part of play given that at present the cyber is the class which has the highest percentage of direct business ceded to reinsurers –  estimates are that in excess of 45% of the risk is ceded and with the ongoing concerns around exposure levels it is understandable that the direct market remains reluctant to retain more business.

As such, capital support from the reinsurance market is now viewed as key if the cyber class is to drive a meaningful expansion, with predictions that reinsurance premium will need to triple in size if growth expectations are to be fully realised.

The key question remains: is the market actually prepared to hedge its bets on reinsurance capacity being adequate to meet the future appetites? If it is, there will undoubtedly be a need to have a focus on how best to match the risks to both traditional and alternative capital. This is likely to require the development of new products, yes, but such development will also come with the requirement for more granular risk modelling to satisfy investors’ concerns over exposure levels, as this week’s Big Question with Daniel Carr, Head of Cyber at Ariel Re, explores.

Ian Summers, Global Business Leader, AdvantageGo

Carr says he believes the cyber insurance market is continuing to develop  but there is a need for new ways of approaching the coverage of the risks involved. “Over the past three years the market has been in a state of evolution,” he explains. “It has suffered a major bump with the level of ransomware losses. They impacted results but to a level which the market could deal with. It has also shone a light on how systemic cyber risk is, and it led to a pretty extreme pricing response.”

However, he adds, this year the market has stabilised, with demand having grown and pricing looking to have flattened. At present, however, he suggests that the reinsurance market is taking a cautious approach:

“We have seen a rise in reinsurance capacity, but they are taking stock of the markets and asking whether they are pricing correctly. On the reinsurance side terms are flat when it comes to quota share; in the past we have seen a large market arrive at 1/1 each year but I cannot see that for 1 January 2024.”

Carr explains there has been some movement in terms of attachments points with those points coming down, but we are still seeing a significant amount of insured risk continuing to be ceded at around the 50% mark.

“Reinsurers have less of an influence when it comes to decision making around the risks that insurers are willing to underwrite but are being asked to have an equal exposure to those risks,” he continues. This has resulted in some reinsurers looking to ease back on the level of participation in quota share agreements. However, this may also have the effect of shoring-up reinsurance capital for the class.

“There is a view that some want to have more confidence in the underwriting decisions,” Carr adds. “It is a positive step.”

With reinsurers arriving in Monaco for the annual reinsurance Rendezvous Carr says he is optimistic when it comes to reinsurers’ approach to cyber risks.

Last year’s rendezvous was dominated by reinsurers taking a hard stance on natural peril risks with major reinsurers announcing they would be reducing their exposure to the perils. Carr believes that this year’s event will not see a similar trend when it comes to cyber risks.

Managing catastrophic risk

“A lot of what has grabbed the headline around cyber cover has been the potential opportunities, but you need the capacity to service those opportunities,” he adds. “Some difficult decisions will need to be made, given the bullish approach to insurers over retentions. The hottest topic at present is around catastrophic cyber solutions and how they can be structured. It remains a systemic and dynamic risk class.”

Carr says that insurers are looking for new reinsurance solutions or the cyber market saying at present the products on offer are essentially a stop loss coverage.

A cat solution using capital market capacity may well be a way forward with capital keen to examine how it can access the cyber market. Such solutions would be of a short-tail nature.

“The capital markets want a degree of comfort in the product and they want effective modelling in order to understand the risks,” he says, adding that the industry will need to address the issue around capital and that will likely mean that a new type of product [or products] will be required that will allow non-traditional capital and security to access the class.

“It is clear that we are entering a stage where there is a drive for growth,” he concludes. “It will require different approaches and products to compliment the capacity we now have.”