Cyber risk has fast become one of the reinsurance industry’s biggest challenges and opportunities, and with an improved understanding of the risks, creating a cyber reinsurance market large enough to absorb the wealth of excess industry capital is achievable, according to Willis Re Chief Executive Officer (CEO), John Cavanagh.
The reinsurance industry remains under significant pressure, with profitability increasingly difficult to come by as traditional and non-traditional, or alternative players fight for a seemingly shrinking share of the market.
A trend highlighted by the continuation of rate declines at the mid-year renewals, on the back of a challenging first-quarter.
In response, companies are eager to enter new, emerging, and potentially more profitable lines of business in the current market landscape, and the growing threat of cyber risk around the world is seen as a real opportunity for the global risk transfer sector.
Exacerbating the negative impacts of a lack of large loss activity and low-interest rates, is the supply/demand imbalance witnessed in the market, driven by an influx of traditional and alternative reinsurance capital, ultimately contributing to the persistent rate declines.
In reinsurance broker Willis Re’s 2017 mid-year 1st View report, CEO Cavanagh discusses how a more developed cyber reinsurance market could actually help to put some of the excess capacity to work.
“The goal of developing the cyber reinsurance market to sufficient scale so that it can help absorb the excess capital currently supporting the reinsurance industry remains some way off but, with an appropriate understanding of risk, it is ultimately achievable,” says Cavanagh.
Cavanagh also noted the broad and costly impact of the recent WannaCry ransomware attack, noting how the event “shone a bright light on the potential for the cyber reinsurance market.” However, by its very nature cyber is an extremely complex risk, and the risk transfer market is yet to get to grips with how best to understand, model, manage, and ultimately protect against cyber risk, and cyber risk accumulation.
Willis Re, which is the reinsurance arm of international brokerage Willis Towers Watson, explains in its report that globally, demand for reinsurance is on the rise as the cyber market begins to expand and, new regulations in the European Union (EU) and Australia is driving additional demand for cyber cover.
Outside of the London market, Willis Re says the majority of capacity remains quota share with largely flat ceding commissions, or stop loss business. Furthermore, reinsurance companies appear to have a focus on aggregate accumulation as the underlying protection grows with first party exposures.
And, risk accumulation remains “the holy grail,” says Willis Re, “with growing subscription to third party models, although these remain untested.”
While the recent WannaCry attack was costly for some and incredibly far-reaching, unfortunately, it takes events such as this occurring for improved models and risk understanding to be achieved, which, in turn supports the development of a more sophisticated and robust cyber reinsurance market.
