Retro: what cyber needs next

Tom Johansmeyer of PCS, Verisk Insurance Solutions, takes a look at the potential in cyber risk transfer.

Some days, it feels as though the reinsurance industry still lives on the fringes of cyber. Risk is moving around, but I still get the impression that we’re seeingonly the earliest stages of this market. And from what I’ve heard, I’m not alone in this. Bermuda, in particular, has yet to realise its true potential in cyber risk transfer.

It’s not all doom and gloom, however. Thanks to signs in the current evolution of this sector, the Bermuda reinsurance community may soonstart to see opportunity ramp up.

The cyber market faces a unique challenge in the global reinsurance industry: capacity, a word that you don’t hear that much. Usually, the insurance-linked securities (ILS) community laments exactly the opposite—too much capital. Cyber, it seems, is a rare exception to this dynamic in the market. While there’s roughly sufficient capacity to cover the business being written right now, there are plenty of cedants who’d like to transfer more risk—and we’ve seen original insureds who’d like the same thing.

It seems that nobody wants to admit that the well has run dry for cyber, but that really is the situation our industry currently faces. Without more capacity, the growth projections bandied about for this line of business could fail to materialise.

The availability of cyber insurance and reinsurance capacity—or the lack thereof—shows the sector’s clear need for a robust retrocession market. And while some spot solutions have emerged, we’ve lacked the structural evolution to accommodate regular, reliable, and optimised cyber retrocession trading.

Perhaps the greatest challenge is the fact that cedants need to know where to go for risktransfer support. Most of the players that would write cyber retrocession write cyber reinsurance already. Retro would just leave them with more of the risk they already have, a situation that could lead to unwanted concentrations if left unchecked.

For the ILS community, which might have an interest in assuming some cyber retro, the challenge involves understanding this complex line of business better, especially when a full view of the data may be difficult to secure.

We’re seeing the first steps toward a global solution in Bermuda, among other ILS locations. The recent announcement of cyber industry loss warranty (ILW) capacity by Hiscox provides a way for reinsurers to gain access to retro capacity without having to reveal proprietary information to risktransfer partners—similar to the benefits of ILW trading in the property-catastrophe space.

‘Affirmative’ cyber ILWs represent just one aspect of a robust global cyber retro market. As the line of business grows, it’ll show the potential to become more fluid. In some years, affirmative cyber cover will become prevalent, particularly following either uncovered losses or ‘silent’cyber claims that have developed unexpectedly.

During quiet loss years for cyber, it wouldn’t be surprising to see silent cyber risk grow, following what could be perceived as a standard softmarket dynamic.We saw the former with Petya/NotPetya, particularly the entry of FedEx and Maersk into cyber. As the Merck loss develops, we should watch to see how it affects the movement between affirmative and silent cyber. During quiet loss years for cyber, it wouldn’t be surprising to see silent cyber risk grow, following what could be perceived as a standard softmarket dynamic.

A retro market would have to be able to accommodate both affirmative and silent cyber along with market movement between the two. In addition to affirmative cyber ILWs and traditional programmes, there’s also room for cyber catastrophe ILWs, as reinsurers seek to hedge exposure to events affecting multiple insurers and insureds across both affirmative and silent covers.

The time is nearly upon us. If cyber becomes ‘the next US catastrophe market’—as the chat up and down Bermuda’s Front Street predicts—then we’ll need to make sure there’s enough capacity flowing into the market to fuel growth.