In a recent webinar titled “Cyber ILS – How can it be brought to the capital markets?” hosted by Twelve Capital, Max Muehlbeyer, Senior Underwriter for Retrocessions & Capital Markets at Hannover Re, shed light on the challenges and opportunities facing the cyber insurance and reinsurance sectors.
Muehlbeyer underscored the burgeoning demand for cyber insurance, which is driving an urgent need for expanded capacity in the reinsurance market.
Muehlbeyer commented, “There are still a lot of annual costs of cyber insurance that simply cannot be covered by the amount of insurance at the moment. So, there is a large protection gap in cyber, and this additional need for cyber insurance capacity, including together with the inherent growth of the cyber market, it will lead to more demand from insurance companies and as a result of that from reinsurance companies as well to support that sector.”
The underwriter emphasized that the current capacity available in the reinsurance market is unlikely to suffice to absorb the mounting cyber risk. To bridge this gap and unlock growth in the industry, Muehlbeyer stressed the importance of transferring some of the risk to the capital markets.
“It was mentioned before that there will be significant demand for cyber insurance in the future, and the capacity that’s currently available in the reinsurance market, on a standalone basis, will in all likelihood, not suffice for taking up that cyber risk,” Muehlbeyer affirmed.
“So, transferring risk or parts of the risk to the retro markets, to the ILS investors is crucial to unlocking that growth in the industry,” he added.
Theo Norris, Head of Cyber ILS at Gallagher Re/Gallagher Securities, also highlighted the pressing need for more capacity to support the cyber re/insurance market.
Speaking on the current state of the industry, Norris explained that insurers are increasingly passing on a substantial portion of their cyber insurance exposure to reinsurers, prompting a call for innovative solutions from the capital markets.
During his address, Norris revealed, “The average insurer is passing on to reinsurance about 50% or 55% of the cyber insurance exposure that they have, and premium. So, what does that mean? That means there’s lots of cyber reinsurance that’s needed as a proportion. The retro market in particular is not sustaining that and the traditional reinsurers are about as close to full as they can be. So, they simply cannot sustain this exponential growth in premium and exposure. Now, that’s where the capital markets come in.”
Rhodri Morris, Head of ILS Analytics at Twelve Capital, an insurance-linked securities (ILS), catastrophe bond and reinsurance investment manager, also spoke in the webinar, emphasising Norris and Muehlbeyer’s statements.
“As Theo and Max have said, the insurance and reinsurance companies are almost at their maximum of what they can take. There’s a huge growing demand of people and businesses wanting more insurance and at the point of now, it’s got nowhere to go. And so, on an analogous to sort of natural catastrophe and the benefits that cat bonds or collateralized excess-of-loss gives to natural catastrophe, we’re at the start of that for cyber,” Morris said.