Cyber reinsurance market shifts focus as resilience grows and cat bonds surge

The cyber reinsurance landscape is seeing major shifts as insurers prioritise resilience and profitability, while innovative tools like cyber catastrophe bonds bring fresh capacity into the market.

Speaking on The Insurer TV, Guy Carpenter’s global co-heads of cyber and managing directors Erica Davis and Anthony Cordonnier shared insights on these changes, emphasising the need for flexibility and adaptation.

Resilience holds strong amid rising attacks

The frequency of cyberattacks continues to climb, but actual loss activity remains lower than expected, according to Davis.

"Organisations are better prepared for these types of attacks," she said. "They’re proving to be more resilient than they were several years ago."

She highlighted how several near-catastrophic events over the last 18 months failed to hit anticipated loss levels, demonstrating increased resilience across the business community.

Despite fears of a massive market-defining cyber catastrophe, the industry has instead faced a string of smaller incidents.

"What we’ve had is a number of needle movers, but not market movers," Davis explained, referring to these smaller events as "kitty cats," which, when aggregated, could still have a substantial impact.

Reinsurers eye profitability, move away from QS

Davis also noted a shift in reinsurance structures, with a focus on profitability. "We’re seeing a little bit of a shift away from quota share," she said, as cyber writers look to retain more profit and utilise advanced modelling for catastrophic covers. This has led to an increase in non-proportional reinsurance options, particularly those offering protection against volatility and tail risk.

The demand for more flexible coverage options is driving innovation, with reinsurers offering a wider range of tailored solutions. "It’s about expanding the number of options available and making sure they’re supported in the modelling," Davis added.

Cyber cat bonds gaining ground

Cyber cat bonds are rapidly gaining traction, according to Cordonnier. "It’s been an exciting development," he said, pointing out that cyber cat bonds have brought significant new capacity into the market.

While still representing a small portion of overall limits purchased (around percent), Cordonnier sees the potential for growth. "It’s not unreasonable to assume the cyber market could follow the property cat market, where non-traditional capacity now accounts for 10 to 12 percent," he added.

The appeal of cyber cat bonds lies in their ability to introduce fresh capital, particularly from players who haven’t previously participated in the cyber space.

However, for now, they remain the province of large buyers. "We’ll have to see where the next cycle of purchases takes us," Cordonnier remarked.

On the retrocession front, insurers looking to enter the cyber space are increasingly using retro structures to access risk. "We’re seeing that shift," Cordonnier said, "because some insurers want to enter the cyber market but would struggle to do that by themselves."

Retro structures allow these insurers to access risk without directly writing cyber policies, expanding the market while managing volatility.

Wordings and innovation

Davis stressed the importance of keeping event wordings relevant and adaptable in the face of new types of cyber risks. Recent incidents like the CrowdStrike outage, which initially projected losses of $300mn to $1bn, have forced the market to rethink how event wordings are structured.

"There’s a huge number of variations of event wordings in the market," Davis noted, emphasising the need for ongoing testing to ensure they remain relevant.

With ransomware now driving only 20 to 25 percent of cyber losses – down from a high of 60 to 65 percent in 2020 – both Davis and Cordonnier agreed that the market is shifting. New innovations, such as ILWs and cyber cat bonds, are helping to bring additional capacity, as the market continues to grow and adapt.

"ILWs will certainly bring new capacity," Cordonnier concluded, underscoring the optimism around future growth in the cyber (re)insurance space.