Even with recent notable capital influxes, the cyber insurance and reinsurance industry’s primary challenge remains securing sufficient capital, as detailed in a new white paper by Gallagher Re, a global reinsurance broker. The report, “The Crucial Need for Capital in Cyber Insurance and Reinsurance,” suggests that cyber insurance will never quite be over-capitalized. The focus is on the entities that will contribute to and profit from luring fresh capital to unleash the full potential of Cyber insurance.
Successful underwriters will be those who effectively blend capital, technology, and data, the report suggests. The paper highlights the distinct characteristics of the cyber insurance market, setting it apart from other underwriting classes due to its growth potential. This growth is facilitated by a wider customer base through product innovation and regional expansion, and enhanced performance through stricter underwriting, portfolio optimization, and tech advancements.
Increased Capital: Catalyst for Growth Over Term Softening
The report emphasizes the distinct characteristics of the cyber insurance market compared to other insurance types, implying that increased capacity won’t lead to prolonged softening, as seen in other insurance lines. In response to ransomware losses in 2019 and 2020, the market took comprehensive corrective actions. Portfolio performance improvements from rate hikes, stricter underwriting, portfolio optimization, and better tech utilization have attracted more carriers to cyber risk and premium.
As the cumulative impacts of these changes reflect in the claims development triangles over the next quarters, this heightened interest will likely grow. This interest may further draw more capacity, which could put temporary downward pressure on prices and coverage in the cyber insurance chain.
In recent years, creativity has been stifled in this previously innovative business class. Market focus on ransomware loss remediation and the subsequent plateauing of product offerings and territorial expansion have been significant factors. As rate increases slowed, Gallagher Re expects a market shift towards a broader customer base, involving product development and regional expansion into areas with low penetration rates and growing demand for cyber insurance.
Achieving this market shift will necessitate innovation among rated carriers and support for MGAs. To meet the increased demand, more capital will be needed, likely attracting more investment and fostering growth.
With an increasingly digital world and a growing reliance on cyber insurance and related cybersecurity services, the cyber insurance market’s ability to respond rapidly and efficiently to significant performance deteriorations will exceed most insurance lines, as demonstrated in its response to ransomware losses.
Reinsurance’s Role in Cyber Insurance
In the insurance sector, a significant reliance exists on third-party capital, with about 50% of all premiums written ceded to the reinsurance community, primarily on a proportional basis.
As portfolios expand and insurers’ confidence levels increase, these cession percentages are likely to decrease, provided insurers are adequately capitalized. However, as the market grows, the absolute ceded amounts will continue to rise rapidly. Thus, carriers will need to continue seeking new capital forms to manage tail risk and reduce their capital loadings. This requirement will also apply to reinsurers, as they aim to grow in line with their clients’ needs.