Reinsurance capacity for cyber risk held back by ‘all risk aggregate’ products

The finite supply of reinsurance capacity for cyber risk is being driven by cyber insurance products combining distinct first- and third-party risks, as well as systemic risks, according to Lockton Re.

According to a report from the reinsurance broker, The All Risk Cyber (ARC) Challenge: An Assessment to Simplify Cyber Reinsurance, while the cyber market continues to mature and grow dramatically, the global ‘all risk aggregate’ reinsurance product continues to trail capacity demand and limits the cyber market’s access to the wider specialised reinsurance market.

Patrick Bousfield, senior broker and chair of the Lockton Cyber Centre, Lockton Re, said: “The current market suffers from a finite supply of reinsurance capacity and a key reason for this is the divergence of appetite between reinsurers comfortable with short-tail (first-party) and long-tail (third-party) risks.”

The report outlines a number of the benefits to breaking the peril into requisite parts, with a particular focus on the differences in how first-party and third-party risks are handled in the insurance value chain. “There is also a big emphasis on the need for good quality data. This approach can potentially improve the access to capital and expertise as well as the handling of potential claims and the related tail-risk development in cyber,” says Lockton Re in the report.

Oliver Brew, London cyber practice leader, Lockton Re, said “Separating first-party cyber reinsurance where possible can increase participation, making it easier to build new capacity aligned with varied reinsurance appetites. It’s important to remember that the specialisation within reinsurance enables the separate perils to be treated differently by distinct parts of the market.”

According to Lockton, separating first- and third-party risk for reinsurance purposes allows clients “to utilise two pools of intellectual knowledge and reinsurance capacity aggregate. Crucially, this allows access to more capital. The standalone cyber divisions and the professional lines divisions of reinsurance companies have separate loss development profiles and are established to support independent assessment.”

Brew added: “Insurance carriers can also have open and frank conversations with insurance buyers and brokers about the impact that risk controls have on the first-party and third-party pricing for the original business.”

Lockton believes that this product clarity could also make it easier to package and trade cyber risks in the secondary and alternative market, encouraging more capital to participate in the market.

Bousfield concluded: “The narrower reinsurance coverage means less tail-risk uncertainty, making it easier for additional capacity. When the risk is as dynamic as cyber, man-made in nature and thus rapidly changing, insurance policies and associated risk mitigation is forever catching up with reality, but this is a real opportunity to get ahead and push the industry forward.”