Timing questioned as new reinsurance entrants target more volatile areas

By Michael Loney

Feb 19 - (The Insurer) – New cyber reinsurance entrants are coming into volatile areas at a time when pricing is softening, adding pressure in the short term, although more capacity will be needed for the market to grow at its projected rate in the long term, according to speakers at NetDiligence’s Cyber Risk Summit in Miami Beach.

Lydia LaSalata, head of cyber reinsurance at Axis Re, commented that cyber reinsurance has seen a deterioration across the market “just as a function of rate and trend”.

“I don't think that's a huge surprise. But what's interesting to me isn't that there are new markets that are coming in and interested in being a cyber reinsurer, but where they're doing it and where their appetite seems to lie.

“We're not seeing them necessarily come in and try to compete with us in the proportional space. It's more the non-proportional structures, where people are trying to place $100 million, $200 million in limit. There's more margin in those non-proportional deals but there's more margin because there's more volatility,” LaSalata said during the NetDiligence session on February 11.

The executive wishes new entrants to good luck, adding: “We all play nicely in the sandpit.”

THROWING OFF THE MARKET'S EVOLUTION?

On the same panel, AJ Dharma-Wardana, VP of portfolio management at Envelop Risk, suggested that “this recent influx of new transactional capacity has, especially in the non-proportional space, kind of thrown off the evolution of the cyber market”.

“They're coming in, they have no real modeling capabilities, they're undercutting pricing as well, and it's just cheap capacity, and also very transactional as well,” she said.

Dharma-Wardana added: “They don't understand the volatility in these structures. And so when a loss happens, they're just going to disappear. I understand it’s the soft market. I think they came in because of their FOMO basically. The timing is terrible. It's not great for us lead reinsurers that have stood by our cedants for years with different structures and supporting them.”

LaSalata at Axis Re noted that the cyber insurance and reinsurance market does need more capacity in the longer term to hit its lofty growth projections, such as Beazley’s expectation of $40 billion of premium by 2030.

“You need a lot of capacity to be able to fulfill that need the market is going to have,” she said. “You're going to need a significant reinsurance market and probably more capacity than we're offering right now. So it's fine that there is new capacity and that they're supporting things that need support, but I would like them to leave pricing to the people that know how to do it.”

Julien Galzy, head of cyber at Scor, cautioned that it is too easy to place blame on the new entrants.

“I think incumbents are driving the price,” he said. “I don't think that the pricing is where it is just because of new entrants.”

Galzy suggested that there are two ways of looking at their decision to enter. He said it could be questioned tactically because of the timing. But he said that strategically it makes sense in the long term “for them to be there at some point depending on how they deploy the capacity”.

He said another factor is what is happening in other lines, where there is pressure. “I think right now, given where property is, where specialty lines are, it's easier to be a little bit braver. So maybe that's what's driving it also,” he said.

Putting this in further context, Oliver Brew, cyber practice leader for international at Lockton Re, said: “The U.S. casualty market has collectively posted multiple billion dollars of additional back-year reserves in the reinsurance market so, compared to that, cyber is a breeze.”

Brew also said the entrance of new players was positive for the market: “People wouldn’t be entering the market if it was stagnant and going nowhere,” he said.

“People wouldn't be entering the market if it was stagnant and going nowhere,” he said.

Cyber Risk Insurer reported last month that reinsurance capacity increased at the 1.1 renewals while demand was flat to down, leading to excess of loss rate reductions and higher quota share commissions.

Howden Re reported in January that there was an oversupply of capacity at the renewal, including nine new reinsurers entering the market for January 1st 2025, adding ~$250 million of capacity.

Based on this publication’s reporting and conversations with sources, new entrants include Oak Re and Mereo as new balance sheet start-ups, as well as Canopius, Brit Re Bermuda, Coalition Re, Perrin, IQUW Re and Aspen Re.

NO LONGER 'ONE-SIZE-FITS-ALL' FOR CEDANTS

On the NetDiligence panel, Dharma-Wardana highlighted that new structures have come into the cyber reinsurance market in recent years.

“In some ways, being in this soft market is actually quite a good thing for the evolution of cyber because we're now seeing some non-proportional structures that we've seen more in the property cat space. The good thing about that for cyber is that we're actually looking to find real solutions for cedants and cedants’ portfolios, and not one-size-fits-all structures,” she said.

Dharma-Wardana added: “We’ve been seeing some structures where you're looking at breaking up the cedant’s portfolio and looking at what retention would make sense for that particular portfolio. We are also seeing structures that address concerns about event definitions.”

Providing a reinsurance buyer’s perspective, Mark Henderson, vice president of underwriting at Aegis Insurance Services, said the introduction of new players and new structures “is enabling us on the buyer side to be more creative and more thoughtful in what we're purchasing and why”.

“The non-proportional space for a very long time was just, frankly, from our perspective as a buyer too expensive and [there was] not enough capital to cover the risk. So for years and years we had proportional structure that worked until reinsurers introduced the cap which changed the game a little bit,” he said.

“It was awesome on our side when it was essentially unlimited tail coverage.”

Henderson said the changing structures are helpful as they enable buyers to fine-tune what they are looking for.

“It’s not just a one-size-fits-all risk transfer. It is: ‘Are you trying to manage the tail? What is your biggest concern? Is it trying to protect capital? Is it trying to just get the most efficient transfer to drive profitability?’” he said.

“There's a bunch of different levers that you can pull these days, now that there are more entrants with different appetites for different types of products and different types of solutions,” he continued.

LaSalata at Axis Re commented that there is a cost for innovation in the tail covers.

“Cyber is a very heavily ceded product compared to other products within the casualty suite, but we should get paid for the innovation,” she said. “At the same time, I think that there's been some recognition of how far out in the tail some of these products were actually attaching.

“We moved on to event covers, and because they are a little bit novel and because we really haven't seen them pay out yet, our biggest concern when we look at these things is: do we have a holistic relationship with the cedant? Because we don't want to wind up in arbitration over the definition of an event, and who's deciding what that event looks like?,” she continued.

Discussing modelling for cyber, Galzy at Scor expressed concern that the market is not making the most of data.

“What I'm worried about right now is the fact that we've had these smaller widespread events in the last year, and I wonder if we're making good use of these data points. I don't know if the feedback loop is working,” he said.

“From what I've seen at renewal, we've not built as a market a collective view of the impact of these events, and that's the first step for moving firms to look at a model.”