Cyber: What does January reinsurance renewal season mean for the direct Cyber market in 2021?

Digital background with locks on.

The January reinsurance renewal season is typically a good indicator of what to expect in the direct insurance market for the year ahead. With that said there were predictions that the January’s Cyber reinsurance renewals would see significant rate changes and further accelerate an already hardening direct Cyber market. However, it seems that reinsurance capital remains strong with many Cyber reinsurance renewals seeing more modest than expected rate increases, though this may not necessarily be a representation of pricing in the direct Cyber market for 2021…

What happened at January 1st reinsurance renewals?

Following a year of substantial Covid-19 losses, significant natural catastrophes and modest investment returns for (re)insurers, the January 2021 reinsurance cycle was expected to further drive the commercial lines rate increases seen throughout most of 2020.

However, despite this expectation, Howdens tech arm - HX Analytics - determined in their latest report that reinsurers were mostly disciplined and discerning at the renewals, indicating similar discipline in the near-term.

“A multitude of factors informed this year’s (re)insurance renewals,” said David Flandro, Managing Director, HX Analytics. “Despite the asset shock that occurred immediately post-lockdown and full-year underwriting losses of USD 100 billion or more, capitalisation has proved resilient.”

“Incumbents and new players raised close to USD 20 billion of capital in 2020 for all purposes, with more to come this year,” Flandro continued.

“This is therefore not a universally dislocated market; differentiated risk management strategies and advice can still unlock access to capacity, even if the landscape has undeniably become more challenging.”

With regards to the Cyber reinsurance market, the Insurance Insider aligned with the HX Analytics position in reporting that rating corrections have generally come in at lower levels than most reinsurers had been hoping for, instead largely focusing on terms and conditions and information requirements.

Douglas Somerville, Divisional Director, Howden Specialty Reinsurance expects that reinsurance strategies may change depending on cedants’ views on writing of Cyber risks.

“Whilst Quota Share (QS) was the preferred route five years ago when the majority of Cyber books benefited from proportional first dollar protection in their infancy, it will be interesting to see how strategies change with cedants’ different attitudes to writing through the next 12-24 months.”

“Do you maintain a conservative QS retention and pick your risks carefully or drive hard for rate and retain more through an XOL hoping to write your way out? We have seen both strategies play out in Professional Lines (PI and D&O) portfolios in the last 12-24 months with success but the risk of getting it wrong can mean leaving cedants with not enough upside or, worse, too much downside.” As ever, reinsurers have an enviable perspective on the market but can really only react to cedant strategy, not dictate it.”

“The low interest rate environment is another factor driving the need for better rate-on-line but also brings new legacy-free capital to London and Bermuda with Casualty ambitions.

Cyber Insurers have weathered and emerged profitably from a number of other ‘doomsday’ predictions (Cyber theft, NotPetya, systemic BI) and they will no doubt weather this one. Whilst Reinsurers may be seeing thinner margins of late, profit still remains.”

This Cyber reinsurance renewal will likely be viewed as a good result for insurers therefore, who will have less additional pressure to drive rate in an already challenging marketplace. According to the Insurance Insider, with steadily worsening loss ratios throughout 2019-2020 in the direct Cyber market, largely driven by the Covid-19 induced remote workforce and a surge in frequency and severity of ransomware, there had been some real concern among Cyber insurers, who cede circa 40% of all Cyber risk to reinsurers. Towards the end of 2020, there were suggestions of rate increases of up to 30% for the 2021 January 1 reinsurance renewals, which would inevitably have affected the direct Cyber insurance market further.

What to expect in the direct Cyber market?

The Howden Cyber and Technology Solutions team have seen meaningful rate increases in recent months in the direct Cyber market and, from our conversations with insurers, expect this to continue. For example, the Lloyd’s trend of 15%-20% rate increases for Cyber insurance across all industries at the end of 2020 has seen no sign of decreasing, with many risks seeing more in the 25% - 40% range, whilst some composite insurers are expecting rate increases of 30%-60% for the New Year. Either way, there will be a real push to provide detailed submission information (including ransomware supplemental applications, biometric questionnaires, engineering reports and perimeter scans among other things) to facilitate risk selection and more accurate pricing.

Howdens Cyber and Technology Solutions team are also expecting to see a more selective appetite for primary business, with many insurers deploying reduced or ventilated limits, as underwriters manage renewal books conservatively and only target new business where the controls strongly justify writing the risk.

Alongside risk selection and capacity management, some insurers are now applying a sublimit and coinsurance to coverages where ransomware was the root cause on some risks. Whether any other markets follow suit will remain to be seen, but ensuring that language is drafted accurately and in line with intent will be vital.

Overall Cyber insurance capacity supply has remained stable and many suggest that the changes to appetite, pricing and underwriting information are justified, as this will be crucial for Cyber insurance to become a sustainable class of business for the long-term.

How to approach Cyber risk placements this year?

At this time, it is key to partner with an experienced Cyber broker that can help navigate these market conditions. By coordinating with your broker early, we can help develop a proactive marketing strategy and focus on the coverage areas and limits most pertinent to a particular clients’ needs in order to hit target premiums. In addition, by consolidating the appropriate underwriting information and pro-actively securing capacity for renewals, brokers can better differentiate risks to insurers and can help insureds to avoid any unpleasant surprises.

The Howden Specialty Cyber and Technology Solutions team are available to assist as each stage of the marketing process to help plan, structure and secure the favourable terms.

Will the pandemic have any further impact on the market conditions?

Covid-19 caused a large number of losses last year and this is likely to continue in 2021. In the UK there are expected to be more claims following the recent Supreme Court’s judgment on the FCA Business Interruption test case.

We are also likely to see new risks resulting from the rapid way in which businesses are embracing technology in order to stay operational. In their Risk Barometer 2021, Allianz suggest that the need for businesses to work from home, monitor process and trade online has increased the extent of Cyber exposures. Therefore, at renewal, organisations will need to demonstrate that new technology driven operations are well thought-through and executed.

What to expect in the reinsurance market?

For reinsurance as a whole, the future is relatively positive. While contending with a broad range of headwinds, it does so from a position of strength. The graph below shows that HX Analytics’ estimate of global insurance capital reached record levels in 2020, and is expected to remain broadly stable this year and next when it should support strong premium growth.

Commenting on the report by HX Analytics, José Manuel González, CEO, Howden Broking Group said: “Whilst the pricing environment may be supportive for carriers in 2021, this should not translate into a degree of risk aversion where underwriters accept rate but shy away from new risks or new business,”

“The global risk landscape is changing like never before. Carriers and brokers have always served clients best by learning from shock events and 2020 is surely a year rich in its lessons. There is much to draw from: COVID-19 has brought the growing ‘intangibility’ of risk into focus, a trend that is only going to accelerate as new technologies continue to redefine risk characteristics”.

Graph to show global insurance capital and premium (all lines) - 1999 to 2022E

About Howden Specialty’s Cyber and Technology Solutions team

The Howden Specialty’s Cyber and Technology Solutions team is dedicated to helping clients with their Cyber risk exposures and has access to all the leading Cyber insurance providers in the London and International marketplaces.

The team is based in London, has a combined experience of over 100 years and is one of the largest direct Cyber premium providers into Lloyd’s of London. We are solely focussed on the advisory, programme design and placement of Cyber and technology E&O insurance on a global basis.