Cyber GWP rises to $15.85 billion with ample room for growth: Howden Re

By Michael Jones, Michael Loney

May 23 - (The Insurer) - Increasing reinsurance and retrocession capacity serve as an indicator of the ample room for growth in the maturing cyber (re)insurance market, Howden Re has said in a report.

Howden Re said competition was intensifying in the cyber reinsurance market, with 62 reinsurers actively writing standalone cyber cover.

But the market is still developing, the broker said, with the top five cyber reinsurers accounting for 62% of cyber gross written premium, while the top 10 account for 87%.

Howden Re said this concentration among a limited pool of reinsurers could challenge future growth.

Of the 36% of global cyber insurance premiums ceded to the reinsurance market, Howden Re said 32% is through proportional structures and 4% is through non-proportional structures.

The broker said there has been a "steady decrease" in quota share cessions as carriers have turned to non-proportional products to protect against systemic risk.

It said that average quota share cessions have come down from 57% five years ago to 45% today, with the reduction gaining momentum after the uptick in ransomware and subsequent rate hardening in 2021 and 2022.

Carriers are focusing reinsurance spend on tail-risk protection rather than broad-based capital relief, Howden Re said. This has combined with a softening in the non-proportional market that has made structures more cost-effective.

The report said that if the market reached $30 billion in gross written premium, and current trends continued, the quota share market would see only one-quarter of total premiums ceded through it, or a 7 percentage point reduction from current levels.

“In contrast, the non-proportional market would grow steadily, with 6.5% of insurance premium allocated to non-proportional cover compared to 4% today,” the report said. “This is primarily driven by event products, including but not limited to, event excess-of-loss, aggregate of events, cat bonds and ILWs.”

Howden Re said the most notable difference between the current market and this hypothetical $30 billion market would be a more developed retrocession market.

“As losses continue to flow through the ecosystem, reinsurers are expected to rely more heavily on retrocession. In this scenario, the share of reinsurance premium ceded to retro QS increases from 6% to 12%, reflecting reinsurers’ efforts to reduce volatility,” the report said.

As non-proportional retro cover grows, catastrophe losses will be more frequently transferred to reinsurers, Howden Re said, suggesting that this is evidenced by the 1-in-200-year aggregate exceedance probability loss ratio of 326% in the hypothetical, compared to 272% now.

“While retrocession aggregate excess-of-loss grows in-line with reinsurers’ portfolios, the retro ‘event’ market grows more significantly,” the report said.

Howden Re also suggested that short-tail exposure, which is well suited for ILS and alternative capital market transfer, is likely to become more pronounced as the market matures.

But for these transfers to originate organically and grow sustainably the market must become more conversant with innovative products such as ‘hard retro’, which provides non-proportional cover for underlying non-proportional reinsurance, it added.