Guy Carp’s Trace: Cyber market expected to quadruple to $20bn in next 3-5 years
The cyber (re)insurance sector could balloon in size to north of $20bn in the next three to five years, with the class witnessing a “ton of rate coming into the market”, according to Guy Carpenter’s North America CEO John Trace.
Speaking exclusively to The Insurer TV, Trace said growth in the cyber market was outstripping any other line of business. While he noted carriers in the space had seen a big uptick in loss ratios in 2019 and 2020, Trace said they had responded quickly by increasing pricing and tightening underwriting.
“There is some concern around attritional loss,” Trace said. “But here’s the good news: rate has come into the market and a ton of work has been done on the underlying policies to mitigate the ransomware in particular, which is what’s been the driver of the attritional losses. The limits deployed by the insurance carriers have gone down tremendously.
“A few months ago I certainly would have put cyber at the top of the list of concerns about the reinsurance capacity being there, but some recent placements have made me come to the realisation that there is really good work being done on the insurance carrier side and as long as it can be proven, there will be reinsurance capacity.”
He added, however, this may involve less quota share, more aggregates, or maybe some type of stop loss put on the quota shares. “But the capacity is there and I think we will ultimately see the reinsurance needs met in the 1.1.2022 placement process,” the executive said.
Marsh’s latest Global Insurance Market Index has revealed that cyber continued to lead insurance price rises in Q3 with increases of 96 percent in the US and 73 percent in the UK.
The broker said US cyber pricing trended higher throughout the quarter, increasing 112 percent in August even though more than 60 percent of clients increased retentions.
Marsh cited the rising frequency and severity of ransomware claims as the leading driver of the increase, with payouts now frequently exceeding $1mn with additional claims payments for business interruption or data exfiltration.
Big themes
Trace said that while catastrophe events usually dominate discussions in the lead up to 1 January, this year a wide range of issues are uppermost in conversations between cedants and reinsurers. These include climate change, secondary perils, ESG, inflation, social inflation and cyber.
“We’re in the midst of our renewals – 60 percent of Guy Carpenter’s business renews at 1.1 – and these are all topics that are taking up our time as we prepare our clients to enter the market for the 2022 placements,” Trace said. “It is probably the most robust period in recent memory of things to talk about.”
On climate change, Trace pointed to a recent Guy Carpenter survey of client attitudes on the topic. The survey’s findings included 84 percent of respondents wanting to start or develop their climate change strategy.
In the property cat space, Trace said that the last five years have underlined the impact of climate change, with the high level of losses including claims from secondary perils such as wildfires.
“The rate that’s come in on the property side over the last number of years, according to Guy Carpenter’s data, is well over 60 percent,” he said. “But when you still look at the business of our cedants, you question whether people are making money in property, even with all the rate that’s come in.
“So I think there’s still momentum for rate that needs to come into the market.”
Casualty cedants look to retain more
In comparison to property, Trace said placements in the casualty space have been easier, with the underlying business benefiting from large rate increases and a pullback on limits.
Trace noted there is sufficient capacity available from casualty reinsurers. He added that cedants are thinking more about whether they should retain more of the business.
“We’ve transitioned some quota shares to excess of loss placements this year, or even frankly a hybrid where you placed a little bit of the quota share and then maybe some more on an excess of loss basis,” Trace said.
“So I would say there’s some changes in buying patterns based upon the insurance carriers’ perception of the profitability of the book. But it’s still a robust market. Plenty of people are looking to buy casualty reinsurance and there’s capacity out there to get the deals done.”