Cyber Reinsurance Now a Buyers Market

After a period of rapid and intense hardening in 2021, the cyber insurance market is now in positive territory, despite an uptick return of ransomware activity in 2023, resulting in availability for cyber reinsurance protection at an all-time high, benefiting buyers.

Following a period of hardening of rates, the cyber insurance market stabilized in the second half of 2022, and started to give rate reductions in 2023, especially in higher excess layers where new capacity has entered the market. With many re/insurers demonstrating increased appetite for cyber risk, the 1/1/2024 renewals delivered ample capacity to meet client demand, as insurers maintained and, in some cases, reduced the amount of ceded business sought resulting in upward pressure on quota share ceding commissions.? Ceding commissions were flat to up 1 point as a result of several large carriers modestly reducing cessions.? This modest reduction in demand with increasing supply is putting upward pressure on ceding commissions. ?

Available reinsurance capacity for non-proportional reinsurance also outstripped demand from buyers, as non-proportional reinsurers looked to enlarge their positions on cyber tail risk.? This resulted in reductions to risk-adjusted pricing, which are expected to solidify further during reinsurance renewals in early and mid-2024.? Risk adjusted pricing was flat to down 5% for renewals, whereas new buyers and startups are seeing more challenged buying conditions.

While competition has undoubtedly increased, the increase in appetite is also fuelled by the fact that organisations seeking cyber insurance are becoming better risks.? Metrics from Aon’s CyQu risk assessment show that the cyber security posture of organizations seeking cyber insurance continues to improve. Insureds have invested in cyber security, improving access management controls and backup strategies. Also contributing is the improved underwriting discipline made by insurers in 2023 since the large spike in ransomware claims experienced by the market in 2020.? This activity was driven by frequency, and subsequent attritional loss across a large spectrum of policyholders.

Cyber Re/insurance market embarks on an exciting new phase?

1. Multiple Cyber Cat bonds enter the market

The end of 2023 saw a significantly positive move with the introduction of two cyber cat bonds structured and distributed by Aon Securities, and which will in the coming years result in a new paradigm for the cyber reinsurance market. ?

November 2023 brought the market’s first 144A cyber catastrophe bond issuance from Long Walk Re, for the benefit of AXIS Capital. The ground-breaking bond provided the insurer with fully collateralized indemnity reinsurance protection for systemic cyber events on a per occurrence basis.

The second issuance of a 144A cyber catastrophe bond quickly followed in December 2023 from East Lane Re VII Ltd., providing insurer Chubb capital protection against the “widespread events” coverage component of their cyber insurance portfolio. ?

Such pioneering bonds are an important milestone for the insurance-linked securities market, and for the wider global cyber insurance market. It demonstrates there is both demand from insurers, and appetite from investors, for event-based catastrophe cyber protection.? Aon Securities has now successfully executed the first ever 144A cyber catastrophe bond as well as the largest ever.? We expect client demand to increase for these types of transactions.?

As noted by Andy Marcell, Aon’s CEO, Risk Capital and Reinsurance Solutions “Sustaining the growth trajectory of what is currently a $15 billion cyber insurance market is only achievable through addressing systemic risk, and access to new sources of capital is key. Through innovation on traditional reinsurance, and the development of viable transactions such as 144A cyber catastrophe bonds, the cyber ILS sector could become a meaningful source of capital to cedants, similarly to how ILS solutions are now commonplace for property catastrophe risk.

2. U.S. makes progress on potential federal backstop

The introduction of a federal backstop would build on a similar public-private sector solution for terrorism in the cyber market.? If the backstop is enacted to complement private capital participation on catastrophic cyber risk, much needed coverage clarity and protection against tail events will help to free up capital to support growing demand for cyber insurance. With digitization and rapid advances in technology like artificial intelligence, demand for cyber insurance solutions can only grow and evolve in the kinds of risks it protects.? At Aon we are confident that as demand grows, insurers will have a comprehensive suite of reinsurance and alternative products to address their protection needs, quota share, excess of loss, catastrophe reinsurance, and cat bonds.

Read Aon’s Reinsurance Market Dynamics report for a comprehensive discussion of the January 1 renewals, including our outlook for reinsurance capital, lessons learned and top tips for navigating today’s challenging market conditions.

Authors: David Grigg, Head of U.S. Cyber, Chris Widowski , Executive Managing Director, Rory Egan , Head of Cyber Analytics, Aon Reinsurance Solutions