Reinsurers are growing more comfortable with underwriting cyberrisk, boosting the coverage available to primary carriers.

"There is significant appetite from the reinsurance market in cyber, and that's been growing pretty steadily over the last couple of years," Anthony Cordonnier, global co-head of cyber at reinsurance broker Guy Carpenter, said in an interview. This applies to both proportional and non-proportional reinsurance cover, he added.

Supply of cyber reinsurance cover historically has lagged demand. But the situation reversed at this year's Jan. 1 reinsurance renewals, and the trend "further amplified" at July 1 renewals, according to Cordonnier.

"We definitely see ... demand being significantly met, and that really gives optionality to buyers of reinsurance," he said.

Much of the capacity growth has come from reinsurers adding cyber capabilities where they previously had none.

"Because of their existing large balance sheets, they were able to scale pretty quickly," Cordonnier said. Existing writers have also expanded their market share, he added.

Clearer picture

Reinsurance plays an important role in cyber insurance, as more than 50% of the cyberrisks insurers write are passed on to reinsurers, according to S&P Global Ratings. Reinsurers have been keen to limit their cyber exposures, largely because of fears about a large event triggering a swath of claims across geographies and business lines at the same time.

Now, however, reinsurers seem more confident that the industry is getting ahold of the risks involved in this cover. That is in part because cyber insurers have raised prices, tightened coverage terms and insisted on better cyberrisk management at the companies they cover after a wave of ransomware claims that started in 2020. As well as improving cyber insurers' underwriting results and making the business more attractive to reinsure, those actions have also reduced the potential size of the claims bill from a large cyber event.

"There's a big difference now between the insured loss potential and the economic loss potential because those who are insured … have to typically reach a higher threshold in terms of cyber hygiene," Oliver Brew, cyber practice leader at reinsurance broker Lockton Re, said in an interview.

In addition, major technology suppliers have made "dramatic improvements," meaning most systems are more resilient to attack than they were a few years ago, Brew said.

Catastrophe scenarios

Better understanding of the vulnerabilities of both insured companies and technology providers means the industry now has a clearer idea of the losses it could face from a cyber catastrophe. Unlike a natural catastrophe, a large cyber event could hit multiple locations and lines of business at the same time, stoking fears of unmanageably large claims bills for reinsurers that sit at the top of the chain.

A common systemic catastrophe scenario is a cyberattack that takes down a large cloud service provider, such as Amazon Web Services or Google Cloud, for a prolonged period. But the realization is growing that while such an event is conceivable, the safeguards in place make it unlikely.

"The industry is getting more comfortable with the likelihood of those things occurring," Chris Methven, chief growth officer at cyberrisk modeler CyberCube. The large cloud service providers "are some of the most sophisticated and highly protected organizations in the world," Methven said. Still, it is "almost unthinkable" that the industry will not face a cyber catastrophe someday, he added.

Better modeling and data are also making cyberrisk more tempting for capital markets investors, who already provide an alternative to traditional reinsurance capacity for natural catastrophes through insurance-linked securities (ILS) such as catastrophe bonds.

Beazley sponsored what it said was the world's first cyber catastrophe bond in January 2023. The deal gives the Lloyd's insurer $45 million of cover, which pays out when its losses from a cyber catastrophe exceed $300 million. The same month, Hannover Re tapped the capital markets for $100 million of proportional cyber retrocession.

The cyber ILS market is in its early stages but making progress, according to Paul Schultz, CEO of Aon Securities.

"It would be our expectation that you would see more cyber transactions within … the next six to 12 months," Schultz said in an interview.

More is more

Brokers are keen to drum up more cyber capacity. Long-tail, short-tail and catastrophe risks are typically placed into the reinsurance market separately but are combined with cyber cover. Lockton Re suggested in a September report that the components be separated when placing cyberrisk with reinsurers, as it can be a tough sell to reinsurers who have limited appetite for some of its elements.

"Our fundamental hypothesis that … if you can allocate the perils to the appetite of the reinsurer, then you'll be able to attract more capacity for each of the constituent exposures," Brew said.

Separation of cyber's long- and short-tail elements would also make the risk more attractive for ILS investors, according to Cordonnier.

If nothing else, reinsurance companies will want to ensure they do not miss out on one of the fastest-growing areas of the nonlife insurance industry. Reinsurers have become more proactive in figuring out how they can get involved in the market "as opposed to sitting on their hands, which they might have been two or three years ago," said Brew.