According to analysts at Moody’s, reinsurance support plays a large role in the cyber insurance market, as primary insurers continue to reinsure cyber risk through quota share arrangements to obtain expertise and capital protection.
Citing Gallagher Re’s 1st View Emerging Equilibrium published in January this year, Moody’s notes that reinsurance pricing for cyber coverage continued to increase with higher attachment points and some treaty limit reductions.
“Reinsurers continue to maintain aggregate caps on quota share reinsurance agreements to manage their accumulation risk,” suggest the analysts.
They continue, “As a result of changes implemented by primary insurers, reinsurers have slowly increased their risk tolerance for cyber risk, and some new capacity has come to the market.
“However, reinsurers are still cautious given the potential for systemic risk and that a widespread cyberattack that escalates globally could result in billions of dollars in potential claims payouts.”
Meanwhile, Moody’s states that the alternative capital market has significantly grown its share of the property catastrophe reinsurance market, but is still in the very early innings of transferring cyber risk.
A few deals have been done, such as the two separate transactions announced by Lloyd’s of London insurer Beazley earlier this year.
In January, the firm issued the first catastrophe bond covering its cyber insurance policies. This $45 million cyber cat bond can be traded under Rule 144A resale, and provides Beazley with indemnity coverage against all perils in excess of a $300 million catastrophe event.
The bond was backed by third-party institutional investors, including Fermat Capital Management, LLC, who are taking on potential cyber insurance claims above a certain level of losses, for a rate of return generally uncorrelated with capital markets.
Beazley also sponsored another $20 million cyber cat bond in May, which is a segregated second cell to its first cat bond, both of which expire at the end of the year.
Beazley’s cyber insurance policies contain standardized policy language, including a defined war exclusion that enabled investors to take on catastrophic and systemic risk.
Read more about these cat bonds, and others, on the Deal Directory of our sister publication, Artemis.
Also in January, Hannover Re developed a retrocessional cover to enable the capital markets to take on cyber risks in Hannover Re’s worldwide portfolio through a quota share arrangement.
Stone Ridge Asset Management, an alternative asset manager, supplied $100 million of investor capital to support the transaction.
Moody’s notes that Hannover Re has a long history of leveraging insurance-linked securities to transfer risks for its clients and cover its risks through the capital markets.
If the capital markets prove willing to support cyber insurance through investments in insurance-linked securities, it could create additional capacity in the market to support growth while enabling (re)insurers to manage tail risk, explains the rating agency.
However, uncertainty around modelling cyber risk and limited policy wording standardisation among carriers could impede the development of cyber insurance-linked securities.
