One of the prerequisites for a growing cyber insurance and reinsurance market is that availability of retrocession must increase, with the capital markets at scale needed to support event-based retrocession covers, according to broker Howden Re.
Adding that, “As buyer behaviour shifts and market losses increase, reinsurers’ risk tolerances will be stressed, creating additional demand for retrocession capacity.”
Luke Foord-Kelcey, Global Head of Cyber, Howden Re commented, “Cyber is maturing into a distinct asset class with diversified reinsurance product offerings. This report reflects the growing confidence of cyber reinsurance buyers and sellers in managing systemic cyber risk. Cedents must nevertheless continue to evaluate reinsurance purchasing strategies critically and holistically, ensuring alignment with risk tolerances and broader portfolio objectives, to maximise risk transfer efficiency.”
David Flandro, Head of Strategic Advisory, Howden Re, added, “Into the Cyberverse makes plain that tomorrow’s cyber market will be powered as much by insight as by capital. Robust models, richer data and advanced analytics are the engines that will unlock fresh capacity, attract new participants and contain accumulation risk. By stress-testing programmes through both probabilistic and fixed-attrition lenses, our analysis pinpoints where volatility truly resides and shows how innovative structures can keep growth on a sustainable footing.”
Howden Re sees the continued development and growth of the non-proportional cyber reinsurance market as key to expanding the cyber insurance universe, but also believes that retrocession capacity needs to grow.
“Offloading cat risk will become an increasingly important focus as the non-proportional market grows. Retrocession event products need to be structured to attract capital markets at scale, accompanied by a willingness to share underlying data to build confidence in the return metrics,” the broker’s report states.
In order to make the cyber retrocession market sustainable, Howden Re calls for more innovation to develop products such as so-called “hard” retrocession, where a retro arrangement is providing non-proportional cover for underlying non-proportional reinsurance.
Second event retro covers are also seen as important, as well as further development of the index-trigger retrocession space such as cyber industry-loss warrants (ILW).
“Cyber model advancements are necessary to support model dependent products such as cat bonds, industry loss warranties (ILWs) and retrocession placements, which are all essential for a thriving, mature reinsurance market,” Howden Re states.
The cyber catastrophe bond market is one avenue for growth and retrocession support, with today’s relatively small amount of activity and cyber limit issued in cat bond form only covering an estimated $82 million of gross written cyber premium.
Howden Re calls for a multi-pronged approach to building-out cyber retrocession, across quota shares, aggregate excess-of-loss, indemnity, and catastrophe bonds or industry-loss warranty (ILW) products.
Scaling up the capital markets for cyber catastrophe risk transfer is critical and could supply the retrocession capacity needs at the shorter end of the tail, which would support further cyber reinsurance growth while the product innovation continues.
