NEWS
Cyber must develop XoL solutions if it is to evolve: Brit
Cyber has the potential to one day be a bigger line than property, but some work is needed on developing an XoL market first.
Study after study has speculated if, and when, cyber will pass the property market by value. But for it to continue to evolve, it must first develop an excess-of-loss market (XoL), which would enable increasingly sophisticated cyber underwriters to manage the very biggest cyber cat events, in the same way they can in the property space.
That is the view of a frustrated Simon Bird, Brit’s buyer of cyber reinsurance for its syndicates. He said the market must focus on pinning down the event definitions needed to build cyber cat XoL.
“Cyber is potentially a very ‘catty’ class,” Bird told Baden-Baden Today. He cited the many catastrophic scenarios possible in the line of business, “ranging from huge systemic possibilities and massive power outages or the iCloud crashing to the mother of all viruses”. He said that to date most of these possibilities have occurred as near-misses or manageable indirect hits.
But Bird can’t buy the type and structure of reinsurance cover those similar catastrophic scenarios demand in property. Primary cyber carriers, and likewise cyber reinsurers seeking retro, are left with reinsurance/retro structures considerably less efficient than those they have in property.
“The absolute drag on the natural development of cyber is this paucity of event coverage,” he said.
Primary cyber carriers by and large begin by buying potentially huge quantities of quota share, a standard practice for high growth in any capital-heavy line. But any number of carriers might feel they’ve grown out of that early-stage simple structure. Major insurers with a big balance sheet and a track record of built-up competence in the line lose perfectly good first-dollar premiums.
“Pro rata is effective, but for a lot of people it is commercially inefficient.”
Simon Bird, Brit
“Why give away chunks of good premium, when with XoL they could retain more first dollar for their own account?” Bird said of what he calls “a baked-in inefficiency”.
Quota share survives as the mainstay because of the lack of alternatives and the convenience of several lazy-man benefits: ceding commissions look pretty good and the simplicity of back-to-back quota share structures means insurers and reinsurers don’t generally end up in heated discussions about event definitions, exclusions, etc. Premiums and loss ratios are shared.
“Pro rata is effective, but for a lot of people it is commercially inefficient, just ceding away so much good premium,” Bird said.
The stop-loss alternative
The lone alternative to date, stop-loss contracts, is equally or more inefficient, and increasingly losing its relevance to the same growing class of large, well-capitalised and fully tech-savvy cyber underwriters with a track record, who may already be tired of quota share. And not just because supply is finite and prices elevated.
The rising class of sizeable cyber specialists can handle most of what might possibly kick them to the type of loss ratio that might trigger a stop-loss contract.
The wild card is a major event and what insurers really want is cat protection, no matter where it puts their loss ratio vis-à-vis the stop-loss threshold after the vagaries of underlying attritional losses. And several years of a wildly hardening rates in cyber has even made the loss trigger (Bird hypothesises a 125 percent loss ratio) a volatile moving target.
“Why aren’t brokers coming up with things?”
“The only way I could ever collect on a stop-loss is not only a fair amount of normal loss—verging on the abnormal—but a big systemic event or a couple of mid-sized events,” Bird said. And his stop-loss cover doesn’t mitigate the major event, just brings him back to an established level of portfolio loss.
The proof is in the market comparison: property-cat cedants have better options. “No-one buys property-cat stop-loss at 125 percent of income,” Bird notes. “Nowhere near it.” Property-cat cedants buy property-cat XoL—and so can their reinsurers.
The difference, of course, is the rather stable and established definitions of nat cat events that back up property-cat XoL treaties and Bird tips his hat to the difficulty of writing stable event definitions which can go obsolete quickly, such is the speed change in technology. “Cyber is a moving target,” Bird says.
Investors would be at hand if the product were on the table, possibly even at the cost of their property-cat bond positions. “The irony is that there is capacity to write that business,” Bird said. “And you have speculative money that would join that marketplace to diversify away from property-cat.”
With sellers at the ready and buyers screaming “take my money”, Bird wonders if the market’s brokers haven’t placed a cap on their commission hopes.
“Why aren’t brokers coming up with things?” Bird asked. “A workable cyber event cover is something that should sell like hot cakes right now.”
Main image: Shutterstock / Monster Ztudio
