Cyber reinsurance market continues to mature

Capsicum Re’s Ian Newman on the increasing demand and continued evolution of the cyber market.

By Mark Richardson, London Editor

The trend of rising cyber losses is set to continue this year, fuelled by the impact of the pandemic and a global shift toward working remotely. Still, Ian Newman, Head of Cyber Reinsurance at Capsicum Re, says that with cyber more a "medium-tail" than short-tail class of business, it's early days to start counting losses.

Newman revealed the broker is already seeing underlying attritional loss ratios going up as a direct result of ransomware attacks. He says these are continuing to increase in terms of both frequency and severity.


“If your treaty is on a quota-share basis, there’ll obviously be a direct read-across when it comes to cyber reinsurance losses, and potentially a knock-on effect if reinsurance is on excess-of-loss basis,” he adds.

However, while the move to working remotely has increased the “surface area for cyber incidents,” Newman says the industry was already seeing a deterioration of the 2018 and 2019 years of account due to the rising threat of ransomware.

Despite a slight slowdown in pace of growth in the underlying market, as a result of COVID-19-related factors, Capsicum Re is still looking at circa 20% growth.

He explains there are four core factors driving strong demand for cyber reinsurance: growth in the underlying market; cedants buying more (books that weren’t previously big enough now becoming worthy); insurers buying more standalone cover where wording and structures are more appropriate; and a large uptick in retro purchasing.

“In addition to this, due to the broader hardening in property & casualty reinsurance, we anticipate reinsurance markets will continue their increased scrutiny of exposure relating to embedded or silent cyber risk in portfolios and exhibit perhaps a reluctance to cover it via traditional P&C treaties,” Newman notes. “Understandably, this is having a compound effect on demand for specialist standalone cyber reinsurance, matched by an appetite from reinsurers to take on more cyber risk in this defined and quantifiable way.” 

In spite of the increased losses, Newman says reinsurers’ attitude to taking on more cyber risk remains positive. Where both the quantity and quality of data is strong there is a particular willingness to deploy more capacity, albeit, he says, with some conservatism based on their own accumulation and exposure management.

“As a specialist broker, our role is now just as consultative as it is transactional,” he adds. “Through expert analysis and education, we help both clients and reinsurance markets become more comfortable and confident with the risks and opportunities of cyber risk, and continue to bring new reinsurer capacity to the market.”

At the same time though he says clients are becoming more knowledgeable about cyber risk and exposure. He reveals that clients are now starting to turn to Capsicum Re with demand for new tailored solutions, a broader range of structures and pricing, and more sophisticated services in the form of modelling and analytics.

“Hence why we set up Capsicum Re’s independent cyber consultancy arm – to meet this rising demand,” he explains.

On terms and conditions, Newman says the class is still evolving rather than tightening.

“The reality is that terms are broadening at the same time as they are being refined and better defined,” he says.

“What we cover today will be different to yesterday. This is the way the reinsurance market has always dealt with fast-evolving threats and emerging risk areas.”

Compared to other spheres of reinsurance, where profitability is a real challenge, Newman says there is currently a good balance in cyber with cedants and reinsurers continuing to achieve adequate margins, making for a healthy market.

Newman is seeing positive rate movement both on the primary side and among reinsurers. Cedants are increasing their pricing, particularly in response to the rise in ransomware attacks, and this is naturally flowing through to reinsurance.

More important than price rises, Newman thinks though, is the “structural evolution” of the cyber re/insurance market as it continues to mature.

“We are constantly seeing reinsurers become more willing to look at and embrace different and alternative structures that are more appropriate to our cedants’ changing demands and needs,” Newman says.

“As a specialist broker we are continually developing new initiatives and alternative structures and working to bring in both new traditional and non-traditional capacity. The demand for our services over and above transactional reinsurance is a major and dynamic change in cyber, and one which is driving the rapid growth of our in-house consulting arm.”