Nastco /
8 December 2017 Alternative Risk Transfer

Missing growth opportunities: Winds of same?

Three hurricanes and three wildfires have been sufficient to drive the global reinsurance industry back into its old habits. We’re obsessed with property-catastrophe risk again, watching aggregate industry loss warranty (ILW) trigger points carefully, and talking about reinsurance rate increases. In doing so, we risk losing sight of the major growth opportunities that should be top of mind—and that were much more relevant half a year ago. The Atlantic winds blew in more of the same, and if we aren’t careful, they could cost us years of progress.

While reinsurance and insurance-linked securities (ILS) players were watching storm paths and counting cars in the Houston area, two major cyber events were announced—both with significant insured losses. This year, PCS Global Cyber has recorded nearly $500 million in insured affirmative cyber losses. Proportionate to the premium in that space, an aggregate loss of that level is far from trivial. And even on an absolute basis, it’s an important warning of what the future could hold.

Contemplate a loss year at some point in the reasonably near future in which we see property-catastrophe losses from major events top $50 billion and cyber losses kicking in another $20 billion. It’s not hard to conceive of that scenario. It could result in significant pressure on reinsurance and ILS fund balance sheets, bringing a woeful surprise to investors who might think about the two categories separately.

The year’s US catastrophes may have distracted the market from the evolutionary path so hotly anticipated over the summer, but we’ll return to that trajectory soon enough. And when we do, especially if cyber lives up to the growth expectations so often voiced, capacity providers will have a host of new challenges. After all, in the risk business, greater returns come only with a heftier portion of risk.

With this in mind, protection sellers will need to prepare for a risk management landscape in which the unthinkable can happen all at once and in several different ways. Market growth and expansion can drive the need for much more active and sophisticated capital management, and every participant in the risk and capital supply chain will need to be able to respond prudently and sometimes quickly.

Cyber, in particular, could prove problematic, given how small the market for retrocession currently is—in conjunction with the potential for much larger aggregate industry losses

If the current state of play is any indication, ILWs could become increasingly important in the near future. On the property-catastrophe side, not surprisingly, demand for this form of protection has increased significantly following the six major catastrophe events of the past few months. And the next time we see a series of events like this, that’s bound to be the case again.

However, there’s a good chance we could also see a series of major cyber risk losses at the same time, which means that cyber ILWs could provide an important level of protection—particularly in the retrocession market, which would help free up capacity all the way down the chain to the primary insurer.

The winds of same must give way to the winds of change. The size and complexity of the 2017 hurricanes (and wildfires) will keep everyone busy through the January 1, 2018 reinsurance renewals, but our industry needs to show it can handle an unusually devastating catastrophe year while also moving forward into new lines of business where original insureds and the risk-bearers that serve them need more ways to optimise their capital.

Doubtless, the availability of ILW markets for property-catastrophe and cyber will be essential to both near-term claim-paying capability and subsequent post-loss-year recovery. While the property side has adopted this dynamic and put it to work several times over the past decades, it’s a relatively new concept for the cyber insurance and reinsurance community. Rather than make the discovery after it’s necessary, it would be much more effective to develop a robust cyber ILW market before it’s needed. After all, there’s no substitute for a robust risk-transfer market when the losses come in and the decisions get tougher.

Tom Johansmeyer is assistant vice president, PCS, at Verisk Insurance Solutions. He can be contacted at:

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