Specialty Re: Diworsification 2.0?

Re/insurance capacity is flowing into specialty lines of business, but the emerging risk environment means specialty lines of business face volatility ahead.

Lloyd’s and international specialty reinsurance business is benefitting in size from a wave of entering capacity. Specialty has always been the London market’s strongest suit, from its marine insurance origins, and remains so, expanded into a vast array of more-or-less correlated business, from space to specie.

Some of this invested capacity has gone into underwriting primary business, and direct and facultative arms, but reinsurers are also looking to grow their specialty treaty books.

The logic is clear: it is a great diversifier, relatively uncorrelated, to the concentration on property catastrophe perils, from hurricane to earthquake, and secondary like wildfire and flood, that account for the bulk of non-life reinsurance exposure and are subject to worsening extreme weather threats.

Specialty lines also appeal as a diversifier from another, more long-tail exposure headache within the portfolio: that of US casualty reinsurance, with US liability books at the mercy of social inflation.

So, what’s amiss? The specialty business classes are quite volatile in 2025, with an unpredictable outlook due to a range of macro-economic and political risk factors.

Take cyber insurance business, which has grown exponentially in recent years at primary insurance level and requires significant increases in reinsurance premium growth for years to come to maintain projected levels of primary growth.

Cyber’s continued growth will include small, medium and large buyers on a global scale. Small businesses in North America and Europe will look to buy protection as attacks continue to proliferate, mid-tier to large firms in emerging markets like India will become cyber buyers, as will Middle East economic growth, led by Saudi Arabia.

All of this will change the risk profile and the buyer makeup in ways not altogether understood for an area of risk changing fast with the technology, the rise of artificial intelligence, and global legal and regulatory environments constantly evolving.

Renewable energy has been another growth area for specialty underwriters, subject to a range of challenges, from fast-changing technology to the cost of commodities, as well as credit risks presented by shifting government subsidies, and a range of geopolitical risks in many areas of the globe best suited for wind or solar farms.

Cargo business is at the forefront of re/insurance impact of recent Trump Administration tariff policy. Unpredictable see-saw policies in Washington are affecting long-term trade patterns in ways that are, yet, unknowable, as companies redress supply chain risks and redirect their cross-border logistics accordingly.

Political violence at treaty level has been another growth area for re/insurers, with reinsurance risk transfer underpinning much of the direct and facultative capacity and premium growth. Again, switch on the news, and the risk environment is self-evident – from increased concerns about social unrest in North America and Western Europe, to the Russia-Ukraine war, a precarious peace in the Middle East, and tensions around Taiwan and the South China Sea.

To avoid hyperbole, the scale of specialty risk being taken on by reinsurers should be viewed in the context of the much bigger sums at stake within property catastrophe business. That said, the recent UK court ruling in favour of airline lessors against aviation war insurers, regarding Russia’s confiscation of western aircraft in 2022, is likely to provide a multi-billion-dollar example of specialty exposure.

It is also worth noting that reinsurers’ core property catastrophe risks are much better understood and modelled than most specialty lines.

Nowhere is this clearer than political violence – subject of a recent AdvantageGo white paper, in association with The Political Risk Podcast, which made the point that analytics are still lacking in PV business, despite direct and fac underwriters facing a fiercely competitive PV market.

Through its partner ecosystem, AdvantageGo wants to play a dedicated role in improving the options available to specialty re/insurance underwriters under pressure to grow profitably, despite the challenges.

Workbench partnerships – such as those focused on cyber, PV and renewables – aim to bring additional sources of intelligence into the Underwriting workbench. These, it is hoped, will aid better decision-making by underwriters, particularly for risk selection and pricing.