Cyber will need massive amounts of additional capital: Gallagher Re’s Newman

Underwriting of cyber insurance and reinsurance risks is going to require “massive amounts of additional capital” to support what is expected to be a particularly fast-growing class of business, according to broker Gallagher Re’s Ian Newman.

Newman, who is the Global Head of Cyber at reinsurance broking unit Gallagher Re, explained that his firm sees cyber adding another ‘C’ to the property and casualty marketplace, becoming PC&C (property, casualty, cyber).

That’s a signal for how important cyber risks are set to become for the global insurance and reinsurance market and also hints at the role for alternative capital and insurance-linked securities (ILS).

For some years now, a significant role for ILS capital within cyber underwriting has been predicted, but actual development of a cyber ILS market has been relatively slow.

While some ILS capacity has supported cyber reinsurance or retrocession arrangements, typically these have been relatively small arrangements and the market has been awaiting a catalyst to drive the need for risk capital and hedging much higher for the capital markets to be required.

In announcing the launch of a new cyber-specific reinsurance broking practice in Bermuda this morning, Gallagher Re’s Newman explained that his firm sees the need for capital as a critical factor for the cyber market development.

“As we head with pace towards the PC&C market we predicted a few years ago – where cyber inevitably becomes just as significant as the property and casualty sectors – cyber will need massive amounts of additional capital,” Newman said.

Adding that, “With its reputation for innovation and entrepreneurialism in catastrophe reinsurance and alternative risk transfer, Bermuda is the obvious place to look to develop some of that much-needed new capacity as well as build out our own specialist capabilities.”

Seb Plummer, who joined Gallagher Re in 2019, is relocating to Bermuda to lead Gallagher Re’s new cyber reinsurance broking operation on the island.

Plummer will join Gallagher Re’s established reinsurance broking team in Bermuda, tasked with the development of specialist services and support for locally headquartered clients, with a focus on the development of cyber distribution, products and capital.

Newman commented, “With his direct market experience, technical understanding of the underlying product, and cyber reinsurance expertise, Seb is the ideal person to help clients and capacity in Bermuda capitalise on a class rife with opportunities.”

Plummer added, “Bermuda is the perfect partner for what is arguably the most exciting and fastest growing area of (re)insurance, and I’m really looking forward to working closely, in person, with our growing number of clients here. There is nowhere better in my mind than Bermuda to seek to develop new capacity that could enable the cyber market to grow sustainably over the next five to 10 years.

“As a market that has recently seen multi-billion dollar injections of fresh capital to support start-ups and scale-ups, Bermuda’s renewed vibrancy and increasingly diverse trading environment makes it ideal for the evolution of cyber, which itself enjoys a distinctive and dynamic ability to adapt and react more quickly than other classes.”

The catalyst that could drive the need for additional cyber risk capital is likely to come in the form of a significant insurance market cyber loss, or the global response to an outbreak of severe cyber attacks.

Either of these could drive the need for protection to support the cyber insurance underwriting market, driving greater need for reinsurance or retrocession, as well as greater demand upfront for cyber insurance and risk management services.

Given the potential scale of losses that could come with significant cyber attacks, as well as the effects cyber loss events could have more broadly in terms of driving business interruption claims, the need for specific and tailored products, backed by robust and adequate risk capital is clear, which is why the chances of a growing role for the ILS market seems assured, as demand for cyber cover and protection continues to expand.