Expanding cyber insurance market demands ongoing capital investment

Peak Re’s Edward Shen says further capital support and accumulation management are key to maintaining the cyber market’s growth.

The cyber insurance market has witnessed significant growth over the past decade, yet there remains substantial room for expansion, particularly among SMEs and consumer segments.

If cyber reinsurance premium continues to grow at the 17 percent compound annual growth rate forecast by Gallagher Re, it could rival the property reinsurance market in size within 15 years. However, the journey is fraught with challenges, particularly in managing aggregate accumulation due to the lack of diversification benefits. To sustain this growth, the market requires more capital support. Peak Re is poised to contribute by providing capacity to its clients.

Evolving trends in the cyber insurance market

The cyber insurance market has experienced notable fluctuations in recent years. Significant losses between 2019 and 2020 led to a hard market phase during 2021-2022, characterised by massive rate increases and a focus on cyber hygiene in underwriting. Since 2023, the market has softened, with more players entering the field. Despite this shift, insurers and reinsurers must remain vigilant about managing aggregate accumulation risks and not be swayed by short-term profitability at the expense of long-term stability.

Improving cyber risk models

One of the key challenges in the cyber insurance sector lies in the accuracy and reliability of cyber risk models. These models, although not flawless, have made significant progress in recent years. They leverage data-driven analytics to identify potential mass accumulation events and stress-test portfolios. Vendors continue to refine scenarios and assumptions, working closely with industry experts to enhance model accuracy. For reinsurers, these improvements are vital. A more sophisticated understanding of risks allows for better portfolio management.

Industry focus on aggregate accumulation management

Recent incidents, such as data breaches at Snowflake, malware attacks on CDK Global and the CrowdStrike-related IT outage, have underscored the importance of robust accumulation risk management for underwriters. From the outset, the reinsurance industry has prioritised managing cyber aggregate accumulation. Early on, critical infrastructure exclusions were introduced, and in recent years, there has been intense discussion around cyber war exclusions. Significant efforts have been made to address potential events such as major cloud service outages and widespread malware attacks.

Event-based reinsurance cover and ILS development

Recently, there has been a growing interest in event-based reinsurance cover, and the past two years have seen notable developments in ILS such as cyber cat bonds and industry loss warranties. Although the current volume of these instruments is small compared to the total aggregate accumulation, there is considerable growth potential.

Peak Re’s commitment to the cyber insurance market

Peak Re is committed to supporting the growth of the cyber insurance market. Our cyber team comprises actuaries, legal experts, cybersecurity specialists and underwriters. Three years ago, Peak Re licensed a cyber model and has since been working closely with model vendors and cybersecurity experts to develop a comprehensive view on aggregate accumulation management. We are prepared to support our clients with our expertise and capacity as they expand their cyber insurance portfolios.

In conclusion, the cyber insurance market is at a crucial juncture. With ongoing advancements in risk modelling and a focus on managing accumulation risks, the sector is well-positioned for continued growth. However, the need for continuous capital support remains critical to reaching its full potential. Leveraging its expertise and strategic partnerships, Peak Re aims to contribute to the evolving cyber insurance market, helping to build a more resilient and secure future for all stakeholders.

Edward Shen, director, head of casualty product underwriting at Peak Re