By Michael Loney

Jan 23 - (The Insurer) - The abundant capacity seen at the 1.1 cyber reinsurance renewals is expected to remain adequate to meet demand this year, but reinsurance brokers have cautioned that more capacity and further innovation will be required for the market to meet its long-term growth potential.

Reinsurance capacity increased at the 1.1 renewals while demand was flat to down, leading to excess of loss rate reductions and higher quota share commissions.

In its latest Reinsurance Market Dynamics report released in January, Aon noted that reinsurance capacity at the important 1.1 renewals was “abundant”, with “supply more than adequate to meet demand”.

“With ample capacity, reinsurance conditions were favourable for clients at 1.1, although reinsurers are watchful of softening in the underlying insurance cyber market with an evolving risk landscape,” the report said.

It continued that “robust” capacity levels are creating opportunities for more creative and bespoke reinsurance solutions, with growing interest from more sophisticated buyers in event-based coverages and alternative capital products such as ILS and industry loss warranties.

Aon described demand for cyber reinsurance as “broadly flat” at 1.1, which it said reflected more modest growth in the underlying insurance market and a move towards higher retentions by some large cyber insurers in recent years.

The broker added that more favourable conditions led many insureds to increase their limits.

XoL rate reductions and higher QS commissions

New players continued to enter the reinsurance space while established players have demonstrated a growing appetite for cyber, Aon said.

“As a result, insurers with an established track record in the cyber market were able to achieve rate reductions for excess of loss reinsurance and/or higher commissions for quota share at 1.1. While adequate capacity was available for new buyers, reinsurers required detailed and robust data before deploying capacity,” the report said.

Elsewhere, market sources have pointed towards a risk-adjusted rate reductions of 10 to 15 percent, with the attachment points dropping for these products in some cases.

Speaking to Cyber Risk Insurer, Paul Preston, senior managing director – US cyber reinsurance broker at Aon, said that the amount of non-proportional capacity “is growing quite rapidly” with a “high degree of appetite”.

“The capacity out there for any one cat deal or event product is likely north of $200mn right now,” he said. “It is likely inhibited in some cases by other purchases on a broader reinsurance program because the same market that might be deploying capacity on an aggregate structure is the same market that might be deploying capacity on an occurrence cat cover.”

In a renewals report released on 2 January, Gallagher Re commented that cyber renewals at 1.1.2025 saw a strong focus on obtaining the most efficient reinsurance structures, amid “extremely healthy” levels of capacity from reinsurers and an improved understanding of tail risk among buyers.

“Increased competition for both quota share and excess of loss placements led to successful negotiations for improved terms and more effective coverage,” it said.

Gallagher Re noted a buyer’s market driven by a lack of underlying growth, increased retentions and increasing reinsurer appetite.

“These factors, coupled with strong performance in recent years, allowed buyers to push for increased ceding commissions across the board and significant risk-adjusted rate decreases,” the report said.

There was also plentiful supply in the excess of loss market, Gallagher Re said, with the increased amount of capacity “further supplemented as reinsurers who have traditionally been more proportionally focused entered this space in a meaningful way”.

Gallagher Re reported that risk loss-free cyber business had rate decreases of 15 to 25 percent.

In a renewals report released on 2 January, Howden Re said that reinsurers considered cedants on a case-by-case basis, with well-performing books achieving risk-adjusted rate reductions of up to 20 percent in the excess of loss market.

The broker said that quota share ceding commissions increased by “a little more than 1 percentage point on (a weighted) average”, but with notable variations including increases of up to 5 points in certain cases.

New and established reinsurers hungry for cyber

Howden Re said that reinsurance buyers benefited from improved supply and demand dynamics in 2024, driven by an oversupply of capacity, reduced demand and manageable large losses.

“Furthermore, nine new reinsurers entered the market for 1 January 2025, including seven established carriers and two balance sheet start-ups, adding ~$250mn of capacity,” it said in its renewals report.

Discussing reinsurance supply in an interview with Cyber Risk Insurer, Jack Sandford, cyber reinsurance director at Howden Re, said it's important to note that there were some nuances in reinsurers’ growth appetite.

“Broadly speaking, capacity was up at 1.1. But some of the more established reinsurers were either looking to hold or maybe slightly shrink their portfolios in an effort to optimise the portfolios,” he said.

“But most reinsurers were targeting some growth, either through expansion of appetite or through aggressive pricing. I think that helped with making it a buyer's market and the context of that is there were some buyers reducing their cessions on QS. That helped to create a surplus of supply.”

Discussing the new reinsurance entrants, Sandford highlighted that eight of the nine were actively looking at event structures among their offerings.

“We saw this willingness to support a nascent product as a demonstration of the confidence and the optimism in the event space, which is I think really interesting, especially because of the focus on XoL products now,” he said.

Howden Re did not name any of the companies providing new capacity. But this publication’s reporting and conversations with sources suggest that they include Oak Re and Mereo as new balance sheet start-ups, as well as Canopius, Brit Re Bermuda, Coalition Re, Perrin, IQUW Re and Aspen Re.

Also speaking to Cyber Risk Insurer, Jasper Goring, head of cyber reinsurance – North America at Gallagher Re, suggested the balance between demand and supply was relatively stable at 1.1 and that “the biggest shift probably happened in the first half of 2024 when a lot of new capacity entered the reinsurance market”.

He added that this capacity was not necessarily from new entrants but more from established reinsurers that now have greater confidence in cyber and were prepared to authorise bigger shares on programs.

“We were expecting clients to be able to see an improvement of their terms, and that broadly speaking happened on both the non-proportional and the proportional reinsurance,” Goring said. “Reinsurers maybe would have hoped for more stable pricing, but I think if they look in the mirror they're probably not surprised at the outcome.”

Sophisticated buyers retaining more risk, with exceptions

In a release issued on 30 December, Guy Carpenter said that the cyber reinsurance market “remained dynamic and innovative” at 1.1, “with buyers exploring a range of blended solutions, from pro rata to event excess of loss and aggregate stop loss structures”.

Other reinsurance brokers commented on the increased focus on buying non-proportional cover. This has come as cession rates in the cyber market have fallen from around 50 percent previously.

In its report, Aon stressed that quota share remains an important source of capacity for the cyber market but said sophisticated buyers are now retaining more risk and looking for targeted reinsurance protection to manage specific volatility in their portfolios.

Aon’s Preston noted that the underlying business continues to be profitable. Cedants are now more comfortable with the underlying risk, meaning they are more willing to take more net and then manage against shock losses and tail risk.

“Generally speaking, we continue to observe a reduction in total cession of quota shares of 5 to 10 points on average,” he said. “In most cases, they were flat to down. There are some outliers, however.

“However, there are examples where reinsurance buyers have elected to purchase more quota share this year. A lot of that predicated on soft market conditions meaning that ceding commission is accretive to the business, and so buying more.”

Sources have suggested that over the last 12 months, at least two carriers in the US elected to drop their quota share altogether and focus entirely on non-proportional purchases.

Howden Re’s Sandford highlighted a trend of increasing focus on profit retention and looking to buy a specific tail cover through either aggregate stop loss $(ASL.UK)$ or an event XoL.

“We saw the number of ASLs attaching below 100 percent doubled versus 1.1 last year, which is quite an interesting development,” he said. “And ASLs attaching below 110 percent have gone up by about 40 percent by treaty count, so actively shifting those retentions downwards,” he said.

Sandford said that the occurrence market continues to grow with more capacity coming in. Howden Re estimates there was around a 55 percent increase in event limit purchased at 1 January 2025 versus last year.

“We still saw a lot of diligence from reinsurers around application of line sizes, so trying to put controls around that in contracts, and also around the loss ratio caps on QS, which didn't appear to move by a huge amount,” he said.

He reported that average loss ratio caps on quota shares were just under 400 percent, which is up around 40 points year on year.

Sandford also provided details on the retro market, noting there was “quite a lot of activity in that space”.

“We've actually seen since 2024 there's been about a 50 percent increase in the number of quota shares being bought on a retro basis,” he said. “Our view is that the growth in the retro market is what's going to help the underlying market grow ultimately, so I think that's a really positive sign.”

He added: “Reinsurers have been expanding their appetite to look at standalone XoL, which in the past has typically been done in support of quota share. They're also expanding their appetite into retro. So that's quite an interesting topic, and it will be interesting to see what happens through ’25.”

No direct pricing impact from CrowdStrike outage

One topic at the renewals was the mini catastrophe events during 2024.

Howden Re in its report said that the series of systemic events in 2024, with the Change Healthcare attack and CrowdStrike outage the two most notable, “proved to be manageable on the loss front and had little impact on renewals”.

“These events did however prompt reinsurers to ask additional questions of cedants on how contingent business interruption and systems failure cover are being underwritten. Some markets have also asked for further data on where these covers are being provided,” the report said.

Howden Re’s Sandford said the broker refers to these events as “cyber kittens”.

“It didn't significantly impact renewals, particularly on the pricing. It did prompt a lot more questions around aggregation monitoring, and monitoring specific coverages. So CrowdStrike threw into the spotlight coverages such as systems failure and dependent systems failure,” he said.

Gallagher Re in its report noted greater confidence around systemic risk at 1.1. It continued that another notable change from negotiations last year was the pivot in focus away from cyber war, which had dominated discussions at 1.1.2024.

Another big focus during 1.1 discussions, Gallagher Re’s Goring said, was rate adequacy given the softening in insurance pricing during the year as well as increased claims frequency.

“We believe the market is still robust. It's still rate adequate, but how much more have we got to go, and what is the tail? We saw a lot of reinsurers being very focused on that,” he said.

Reinsurers were also interested in where growth for cedants would come from.

“The growth story in the international market is still pretty robust, whereas growth in the US has been relatively stagnant compared to other years. Yet a lot of cedants are still projecting growth into 2025. Where is that growth coming from? Is that going to be unlocking new territories? Is that product distribution? Is that getting a new subsection of industry vertical or revenue occupancy group to start buying the product for the first time?” Goring said.

“I think everyone still firmly believes that there is a lot of organic growth still to come in the cyber reinsurance market, but we either need an incident or some renewed innovation in order to unlock that growth potential that still sits there.”

Howden Re also noted that growth in the global cyber insurance market slowed to 5 percent of gross written premiums in 2024, compared to the 26 percent compound annual growth rate recorded between 2018 and 2022. This reflects lower rates and high penetration in mature markets.

The broker said that attention is turning to regions with lower take-up rates of the product, such as Central and Eastern Europe, the Middle East and Southeast Asia, but increasing penetration will take time.

Talking to this publication, Howden Re’s Sandford said a lot of reinsurers are actively exploring ways that they can help their cedants grow the underlying market.

He also commented: “Although underlying rates have softened recently, they are still tracking way above pre-ransomware levels. That's something that we would as Howden like to point out quite regularly, and is one reason why a lot of reinsurers are still looking to grow significantly in this space.”

Aon’s report said that growth in the cyber insurance market is expected to accelerate, especially in less mature markets.

“Reinsurance capacity should be adequate to meet demand in 2025, yet the market will require more capacity and further innovation longer term to remain relevant and support insurers with tailored reinsurance protection,” it continued.

This was echoed by Gallagher Re’s Goring, who expects the availability of capacity to remain the same in 2025.

“But I think we'll see some innovation in terms of reinsurance product that is available, be that how an agg stop loss works, where it can attach, how that interacts in more of a working layer,” he said. “Cyber reinsurance still doesn't really have a solution for per risk. Risk XoLs are a massive part of the casualty market and a massive part of the property market, and don't really exist in cyber at the moment.”

He continued: “I feel it likely that we will continue to see a broadening of the menu of reinsurance products that clients have for cyber, and with that needs to come a lot of innovation from the broking community, from the reinsurance community, and a motivated buyer who wants to do the work.”

Cat bond interest continues but no new deals at 1.1

Interest in cyber catastrophe bonds continued in 2024. Aon said that this provided additional capacity and competition for cyber reinsurance at 1.1.

The cyber cat bond market now stands at $785mn of bonds outstanding across six distinct transactions and four sponsors. Aon said that this makes up nearly 2 percent of the cat bond market.

“With improved modelling and understanding of potential cyber loss scenarios, further deals are expected, although these solutions are typically best suited to players with larger and more diverse cyber portfolios,” the report said.

Aon Securities expects the cyber cat bond market to grow in 2025 and beyond.

Investors are being attracted by the short-tailed nature of event-based excess of loss coverage and the diversification against portfolios of natural catastrophe risk.

Gallagher Re said that growing interest from investors is driven in part by the education undertaken to introduce this class of business to the market. Gallagher Securities has placed more than 60 percent of the 144A cyber cat bond market as of Q4 2024.

“The need to expand investor participation is critical to market development with demand also growing,” Gallagher Re’s report said.

No new cat bonds came to market at 1.1.2025.

But Jasper Goring, head of cyber reinsurance – North America at Gallagher Re, told this publication that there remains “a very strong interest from buyers in what cat bonds can do for them”.

“There is unquestionably more growth to come, both in terms of the number of bonds that can be placed and the amount of cat bond limit that's available to a cedant,” he said. “Yet for the vast majority of clients, there is enough rated reinsurance to be able to meet their needs. It is only the very biggest treaties that have really felt a need to go out and diversify their capital pool.”

Jack Sandford, cyber reinsurance director at Howden Re, pointed out that cat bonds are multi-year deals so some big buyers would not need to come back to the cat bond market soon.

“In terms of how quickly this can grow, the activity we saw last year obviously points to a lot of investor appetite and that will continue to drive interest,” he said. “But I do think we need some more stability in the modelling space, which would help improve their ability to be incorporated into these kinds of tradable products.”