New data provides clear support for why the insurance-linked securities (ILS) market has always been so interested in cyber risks as an avenue of market expansion, as reinsurance broker Gallagher Re predicts cyber reinsurance premiums will overtake property catastrophe reinsurance before 2040.
We’ve been writing about cyber risk as a possible new class of business for the insurance-linked securities (ILS) market since 2015, but so far little headway has actually been made.
When we first wrote about cyber as a class of reinsurance business the capital markets may be required to support, it’s interesting to note we were talking about a $1 billion market opportunity, as traditional capacity was lacking.
The latest data from Gallagher Re suggests a far bigger opportunity is going to be available, as the cyber reinsurance market is expected to grow rapidly and exceed the size of the global property catastrophe reinsurance market a few years before 2040.
The broker says that the cyber ‘underwriting revolution’ is now well underway and the company predicts a second wave of growth in cyber risks.
“With decreasing loss ratios, restored profitability and confidence plus loss mitigation through technology-led solutions, Cyber will become a true insurance ‘heavyweight’ where Cyber reinsurance premium will ultimately outstrip that spent on either Property CAT or Casualty reinsurance,” the broker explained this morning.
Gallagher Re’s new paper predicts that the cyber market will become comparable in size to either Property or Casualty by 2040, but exceed property cat in terms of annual reinsurance premium a number of years before.
Leading to a new PC&C (Property, Casualty & Cyber) market developing over the coming years, with cyber an increasingly important component as its premiums expand.
Gallagher Re said that cyber has experienced a crunch in capacity against “a backdrop of an unrelenting rise in demand,” which it notes has led to a decoupling of premium and aggregate exposure.
“This has enabled (re)insurers to leverage the full range of tools at their disposal, from cover to use of technology, as they look to deploy their budget against better quality risks – all of which lays the foundations for future growth, as growing appetite for Cyber risk will stem from its increasing profitability,” the broker said.
Which leads the Gallagher Re Cyber team to predict a second wave of growth in cyber premiums from 2023, with profitability improving thanks to decreasing loss ratios, which the broker believes will attract “capital and confidence to further drive capacity growth.”
The broker also predicts a ‘data arms race’ between re/insurers and Cyber Security vendors as they seek out that all important competitive edge.
We’d add the brokers in here as well, as third source of competition for control of a growing cyber risk insurance and reinsurance marketplace.
Calling this expected dynamic a ‘land grab’, Gallagher Re boldly forecasts a forced “convergence of insurance and Cyber technology vendors, in many instances through partnerships and acquisitions.”
The forecast is that cyber reinsurance could double in size every three years, with cyber reinsurance premiums having the potential to exceed property cat in the 2030’s.
Ian Newman, Global Head of Cyber at Gallagher Re, commented, “We anticipate market-shifting changes to occur as Cyber reinsurance outpaces Property CAT – with Cyber ultimately becoming the most-purchased type of cover globally by individuals, SMEs and large enterprises. For example, we predict the majority of Motor premium will become part of the Cyber market, as Motor insurance transforms into a technology warranty for owners of large fleets. Aviation and Marine will see similar shifts.
“We expect this convergence of technology solutions, Cyber-Security techniques, and (re)insurance to create a virtuous cycle. Investors will seek to protect their invested capital and Cyber will become the model class for product innovation and diverse distribution.
“While there are many factors that could influence the future of the Cyber market, much of what our paper explores is, we believe, a matter of not if, but when. Sci-fi has a history in predicting the future and there’s no reason why “CY-FI” won’t do the same. We’ll just have to wait 20 years to find out.”
While this isn’t a particularly bold prediction, as cyber risk is expanding massively and underinsured, while a lack of reinsurance and retrocession, as well as dysfunctional marketplace for those tiers, has greatly held back cyber’s development in the last few years, it’s telling.
Mainly because the ILS market is increasingly turning its head towards cyber risk, as a potential future class of business that ILS capital and instruments such as catastrophe bonds will become relevant to.
If cyber is a market opportunity at least as big as property catastrophe risks, in terms of premium, the entry of capital market backed capacity and insurance-linked securities (ILS) is inevitable, as re/insurers will need to diversify their own sources of protection as they grow into this space.
The pace of growth is going to be significant and the most interesting dynamic of cyber’s growth will likely be the various arms races and land grabs that emerge, with a data and tool focused arms race between major brokers and underwriters likely to be another point of value-chain friction that will be interesting to watch play-out.
The winners in cyber reinsurance stand to benefit significantly, so if it grows as fast as Gallagher Re predicts this will be a hotly contested growth opportunity, perhaps the most hotly contested in the market’s history, as we haven’t really seen a new class of business explode like this before.