Alternative capital not hindering Munich Re’s cyber growth (yet)

Reinsurance giant Munich Re aims to keep a 10% share of the growing global cyber marketplace and so far says that alternative sources of capital are not impinging on the cyber sector, with little competition seen from ILS market sources.

Much has been made of the potential for the insurance-linked securities (ILS) market in backing certain types of cyber risk exposure.

For a starter, it is assumed that global cyber risks are so enormous that traditional reinsurance capital alone will not be sufficient to support them, as cyber insurance exposure grows.

While major insurers and reinsurers have called for the capital markets support in addressing the need for cyber risk coverage, including Munich Re itself and major player AIG, so far there isn’t much sign of the ILS market accelerating into cyber underwriting.

There have been a handful of niche private ILS transactions involving cyber exposure, ranging from quota share style collateralised reinsurance participations in layers of cyber programs to the inclusion of cyber exposures in Credit Suisse’s operational risk catastrophe bond deals.

But meaningful cyber ILS activity has yet to be seen, something Munich Re confirmed recently.

Munich Re’s Head of Cyber Services and Innovation, Ali Kumcu, spoke with analysts last week about the reinsurers progress on writing cyber business.

He explained that Munich Re remains the lead reinsurance market for cyber risks, as well as writing direct business through its HSB subsidiary in the United States.

The company estimates that global cyber gross written premiums (GWP) now amounts to around US $8 billion (2018), up 100% on the prior year, of which the company has a 10% share.

Munich Re is comfortable with this market share of cyber risk and aims to sustain it, as our sister publication Reinsurance News reported, even as the cyber risk market grows significantly.

2018 saw the company writing almost $500 million of premiums in cyber business, roughly split between primary and reinsurance business.

Given the rapid growth expected in cyber exposures and the need for protection, cyber risk is one of Munich Re’s main strategic growth areas, Kumcu explained.

But so far the company is not feeling much impact from the interest shown by ILS market players in cyber risk, with the firm believing that improved vendor risk models for cyber exposure will be required before any meaningful push by ILS funds into cyber risk is seen.

In addition, Munich Re tends to bundle cyber protections with other cyber security related services which it believes acts as a barrier to entry for players who can only provide capacity.

As a result, the reinsurer believes that third-party capital providers will in the main struggle to compete meaningfully in the cyber reinsurance market.

However, the risk of cyber loss accumulation means that retrocessional capacity is going to be key for the cyber market to continue to grow at its current pace.

It may take the development of better risk models for this to become apparent and the accumulation risk factor to become easier to price for, but in time the capital markets do present a viable route to securing capacity to support their own cyber underwriting needs, for the major re/insurers of the world.

Other companies, including Swiss Re, have said before that the insurance-linked securities (ILS) market can provide much-needed loss absorbing capacity to support cyber insurance and reinsurance market growth.

While many have also suggested the potential for cyber ILS and catastrophe bonds, or specific industry loss based instruments for transferring cyber exposure to the capital markets.

So there is a lot of potential for the ILS market to become more involved in cyber risks in time. But for now, reinsurers like Munich Re are able to dominate the provision of capacity in this market.

Please do answer this survey on the potential for transfer of cyber risks using insurance-linked securities (ILS).

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