A shift away from quota share cover as well as aggregate stop-loss deals will leave carriers retaining more risk in a softening market, which should help to reinforce pricing discipline, as Insurance Insider US has previously argued.
This comes as the interest in buying occurrence-based covers is kicking up a gear as the emerging cyber retro market received new interest and the first flurry of cyber cat bonds were completed. This included a deal from Axis, as the carrier aligned its programme with event-based protection rather than stop-loss.
However, the “jury’s still out” on whether the reinsurance market’s surplus appetite for cyber risk could result in softening costs and any offsetting influence on underlying prices, as one source said. For reinsurers, the shifting buying patterns puts more onus on them to manage pricing cycles more directly, another noted.
A canvassing of the cyber reinsurance market has shown that more capacity from reinsurers is accessible, but cedants, particularly outside of the Lloyd's market, are retaining more risk and shifting towards event-based cover.
Moving from the mainstays
The evolving practice in cyber reinsurance buying reflects both increased scrutiny on costs in a softening market, and some carriers becoming more comfortable with attritional loss ratios.
Gallagher Re noted in its latest report that rising attachment points also led to increased scrutiny over aggregate stop-losses.
Source opinions varied on why this shift is underway in the cyber market, with one suggesting that reinsurers offering non-proportional stop loss coverage have priced themselves out of the market.
One source noted that the "mainstays" of cyber reinsurance are quota share and aggregate.
Gallagher Re's global head of cyber, Ian Newman, told Insurance Insider: "There has been a bifurcation in the market, with different clients buying different structures for different reasons. Some carriers continue to be concerned about the attrition, and are therefore sticking with the traditional structures, quota share and aggregate.
"Others have greater comfort around the tail and therefore are overall buying less, and then there are those who have more comfort around attrition, but the tail remains a concern, so they have pivoted away from quota share and aggregate towards occurrence structure."
Several senior sources agreed, with one noting that cyber has proven to be quite a profitable venture for many carriers in recent years, so they feel if they retain more, then that will ultimately manifest in the most profitable outcome for the overall entity.
The National Association of Insurance Commissioners has reported that the average loss ratio for the largest 20 cyber insurers in the US in 2022 was just under 44.6%, down from 66.4% in 2021.
Cat bond leverage
However, migration towards occurrence covers remains underway with a number of cyber cat bonds done this year.
Aon Securities has projected that, as of the end of 2023, over $400mn of cyber limit will have been placed into the cat bond market, and with a total cat bond market value of approximately $42bn, there is "significant runway for growth" in the cyber cat bond space.
The cyber retro market received a "massive increase in demand" with retro deals oversubscribed by 50%, a separate source said.
Three or four years ago there was very little retro being purchased, but sources noted that this trend is one they believe is likely to continue.
Reinsurance competition
The cyber reinsurance market is becoming more competitive as sources noted that the impact of insurers retaining more risk has been exacerbated by the backdrop of reinsurers expecting more exposure growth flowing through from insurers, which wasn’t realised.
Now, one reinsurer noted, cycle management will become more and more important on both the insurance and the reinsurance side.
One source said that, with the 1 January renewals causing a shift in supply/demand dynamics, "there's always a concern that an oversupply of reinsurance capacity creates a softening in the underlying market. I think they the jury's still out to see what impact it's going to have”.
They added that "even if there is this increased [reinsurer] supply at the moment, if we do see demand for insurance increase again, that should stem some of the potential softening that has to materialise”.
The slowdown in exposure growth was touched on in broker reports. Gallagher Re said in its report that softening rates and slowing organic growth meant many insurers struggled to meet income targets over the past year.
This in turn meant more quota share reinsurance was available, and new reinsurers also entered the market based on prior-year cyber remediation. These trends helped cedants secure higher ceding commissions, which rose by 0.5-2 points.
Sources said many cedants did not hit their premium targets in 2023, as rates did not meet initial budgeting expectations.
Despite reinsurance competition, sources said major leader Munich Re was able to move ahead and secure cyber war exclusions, as this publication reported earlier this week.
Brokers said they hoped that the civil and “responsible” renewal outcomes on war wordings would enable the market to put messy discussions on these details behind it after a year of negotiations.
Rates and innovation
Sources agreed that the reinsurance market has a watchful eye on rates, as many, including sister publication Insurance Insider US, have asked whether 2024 is the year we see the cyber market go into freefall.
Reinsurers said, however, that despite rate softening the primary market is still looking "healthy".
As one source said: "The penetration of the class is still low, which is an inherent bulwark against softening as cyber still has new business coming in."
Sources said "[the market has] to get back to talking about how we can grow the product and how we can ensure that cyber remains a viable line of business for many years to come”.
Gallagher’s Newman agreed that the last few years have not been filled with innovation.
"For a number of years, insurers were hitting their premium targets through rate increase alone," he said. By gaining their growth just by rate, they didn't have to go into new territories or new products, he explained, but suggested that they are now losing that tailwind.
He added that this is causing carriers to move back towards innovation. "In 2023 this changed as we saw rates flatten or even decrease. As a result, we are now seeing many players pursuing new growth avenues. This is represented in both geographical expansion and product innovation.”
With carriers taking more risk net for 2024, then the need for discipline amid a falling market is more important than ever.
Brit and Axis declined to comment on their reinsurance purchasing.
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