Buyers Driving Terms on Cyber Reinsurance Renewals

It was a buyers’ market for cyber reinsurance at Jan. 1, driven by improved results in the primary market and more options for transferring risk, according to recent broker reports.

Source: Advisen | Published on January 5, 2024

Growth in cyber insurance market

It was a buyers’ market for cyber reinsurance at Jan. 1, driven by improved results in the primary market and more options for transferring risk, according to recent broker reports.

“The return to heathy results in the cyber insurance market affected the demand-supply balance at the 1/1 renewals, to the benefit of cyber reinsurance buyers,” said Aon in its Reinsurance Market Dynamics: January 2024 report. “As long-term confidence in the cyber market continues to build, insurers are looking to reduce the amount of business ceded to reinsurers, putting quota share ceding commissions under upwards pressure at the January renewal, which sees a significant number of large cyber quota share portfolios renewing.”

Aon highlighted policy language around cyber warfare as a “major focus” in the Jan. 1 renewals, with “divergent” views among cyber reinsurers. Buyers found enough capacity to complete programs without having to implement changes to their language, according to the report.

“War exclusions are, however, only part of the bigger issue, of how the industry mitigates the potential risks of catastrophic and systemic cyber events,” the broker added. “Critical infrastructure exclusions, which limit insurers’ exposure to a major power outage or disruption to an internet service provider, are a significant source of systemic exposure for the market.”

In a report issued this week, the team at Gallagher Re highlighted the fact that positive results in the cyber market attracted capital from new reinsurers as well as increased interest from existing players seeking to take advantage of better returns.

“On the buyer side, we also saw a trend of larger and/or more sophisticated buyers scaling down or dropping cessions to improve ceded margins – meaning that reinsurers are increasingly signed down or removed from placements in their offered terms are unfavorable,” said Gallagher Re. This results in an increase in the proportional reinsurance capacity available and “the ability of buyers to drive terms as the supply/demand balance shifted in their favor.”

Gallagher Re also reported growth in capacity for aggregate excess of loss/stop-loss products, although demand for it remains flat and buyers saw pricing decreases between 5% and 20% this year after several years of hardening terms. In fact, some buyers dropped their existing aggregate stop-loss covers and shifted to occurrence/event covers. This market is still developing and has a “significant way to go,” but Gallagher reported a “distinct trend” in buyers seeking such coverage.

Aon also observed a “record number” of catastrophic event cover placements at Jan. 1, calling the products “the fastest growing product type within cyber reinsurance.”

“This is driven by increased market maturity around the key challenges of developing catastrophic cyber event definitions and modelling of catastrophic cyber risk,” said the broker.

ILS comes to the table

Brokers took note of the surge in cyber catastrophe bonds in 2023, which offered reinsurance buyers more avenues to risk transfer leading up to the Jan. 1 renewals. Guy Carpenter observed a “record year” for the catastrophe bond market in 2023, with an estimated $415 million in cyber placements in 144A market.

Beazley, Chubb, and AXIS Capital have led the field in cyber CAT bond placements and brokers emphasized the significant impact this will have on reinsurance going forward.

“ILS investors are now leading the way in further developing a catastrophe market for cyber,” said Aon in its report, adding that it “is optimistic this market will continue to develop and provide insurers with much needed capacity to further enable the growth of the cyber insurance market.”