Concerns over scope of cover limit cyber reinsurance capacity

MONTE CARLO, Monaco — Reinsurers have increased their volume of cyber business, but capacity growth is constrained by concerns over the breadth of coverage offered and inconsistency in exclusions for war risks. 

Reinsurers and brokers are working on solutions, though, and the development of cyber risk models will likely lead to more conventional and capital markets-based capacity entering the sector, experts said during meetings at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo, Monaco, last month. 

The total global cyber insurance market premium is about $14 billion, and about 50% of the business is reinsured, said Gianfranco Lot, chief underwriting officer, property/casualty reinsurance, at Swiss Reinsurance Co. Ltd.

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Reinsurers and insurers are in discussions on defining the scope of cyber insurance, including issues such as ransomware, malware and cyber war, he said. 

“Contract certainty is really important,” Mr. Lot said.

Munich Reinsurance Co. writes about $2 billion in cyber premium and sees significant growth potential in the market, said Stefan Golling, a member of the reinsurer’s board of management.

“It’s important to achieve a sustainable market,” he said. 

To do so and standardize coverage, greater transparency is needed on the underlying risks, scope of coverage, and data on the exposures and accumulations, among other things, Mr. Golling said.

“If we as an industry overall don’t understand the accumulation, if we potentially even risk that we overexpose our overall balance sheets, then I think the cyber market is dead before it actually has achieved a meaningful size,” he said.

For example, while reinsurers can cover property-related war risks in certain geographic areas, cyber war risks include potential global exposures, which would be uncontrollable, Mr. Golling said.

Cyber war risk is a major concern for reinsurers, said James Vickers, London-based chairman international, reinsurance, at Gallagher Re, a unit of Arthur J. Gallagher & Co. Reinsurers do not want to cover the risk in conventional treaties, but there are several different exclusions used in the primary insurance market. 

“The primary market has at least four major variations and reinsurers have slightly different views on each one,” he said. “It will settle down, but whether it will completely settle down for this renewal or whether it’s got another year or two to run, let’s wait and see.”

As cyber risk models are developed, more capacity for the risk will enter the market, particularly from the insurance-linked securities sector, Mr. Vickers said.

“Reinsurers are getting more comfortable with models,” said Brittany Baker, New York-based vice president of solution consulting at CyberCube Analytics Inc., a cybersecurity and analytics company.

ILS investors are showing significantly more interest in cyber risk and are focused on issues such as event definitions, scope of coverage and when will the invested capital be released, she said.

“They are more open minded to cyber as an asset class,” she said.

Dividing cyber coverage in constituent parts could make it appealing to reinsurers and ILS investors, said Patrick Bousfield, Bermuda-based senior broker at Lockton Re and chair of the company’s cyber center.

Cyber insurance combines coverage for first-party risks such as ransomware, third-party risks such as errors and omissions liability, and systemic or catastrophe risks, he said. 

“Right now, the product is funneled all together with three for the price of one, which faces a little bit of a headwind because of the global aggregate,” Mr. Bousfield said.

Traditional reinsurers should be comfortable with first- and third-party risks, but capital market products may be the best solution for catastrophic or systemic risks, he said. Some reinsurers, including Beazley PLC, have developed cyber catastrophe bonds.

Hannover Re SE, which in January placed a $100 million proportional retrocession coverage in the capital markets, is working on alternative risk transfer products for cyber risks, said Silke Sehm, a member of the reinsurer’s executive board.

“We are focusing, for example, on cloud outage. If you have good data and can collect data on cloud outage, which is a major risk for the cyber business, then you can try to do some sort of parametric cover,” she said.