GC’s Davis: Profitability, maturity of cyber segment attracting more reinsurance capacity

Guy Carpenter’s Erica Davis has said that strong growth in the cyber market, along with better risk controls, shrewd limit deployment and increased confidence in attritional loss picks has attracted increased capacity to the cyber segment.

The intermediary’s global co-head of cyber spoke to Cyber Risk Insurer in an interview at this month’s PLUS Cyber Symposium in New York, and said that despite rising frequency and severity, premium growth across the segment has acclimatised reinsurers to cyber.

“2019 and 2020 – heavily ransomware-impacted years – really propelled the discipline and market rigour around this line of business, and it was needed in order to course-correct from some of the loss activity being evidenced across portfolios,” Davis explained.

“But I would say those efforts extended not just to insurers, but reinsurers as well, and so we saw enhanced scrutiny on data – it needed to be more granular, it needed to be more timely,” she noted.

“We saw a lot more touch points taking place with portfolio heads, business heads, and the reinsurers who support them. And then I would say we’ve moved even beyond that. And now there’s a lot of strategic connectivity being sought [between reinsurer and clients],” she continued.

“We’ve gotten the data to a good place. We’ve gotten the touch points and the dialogue to a very strong point, but we are continuing to see reinsurers wanting engagement with the clients they support and making sure there’s transparency and currency to those strategic initiatives.”

“A lot more premium supporting losses”

The Guy Carpenter executive noted that claims frequency and severity are up, but the maturation of the cyber segment in the past several years has made both insurers and reinsurers more comfortable with the risk.

“We have to remember that we’re also in a far better place as a market to sustain and absorb that loss activity,” Davis said.

She pointed to the fact that the cyber market amounted to around $15bn in premium in 2023, driven by 183 percent in rate increases since 2021, according to Guy Carpenter figures.

“You’ve got a lot more premium supporting those losses, and then you had a huge amount of focus in those same years on elevated underwriting,” Davis explained.

“You had improved risk postures, better risk controls in place, higher retentions, lower limits being deployed. So all of that has meant that even with heightened activity, the portfolios are performing profitably,” Davis commented.

“There’s strong performance. We see that reflected in the amount of capacity that was still available in the market at 1.1, and we think that will continue to be the case, at least through mid-year,” Davis continued.

“Very confident” in attritional loss picks

Given the data generated by loss activity and overall market growth in recent years, Davis said she and her team are “very confident” in the firm’s assessment of attritional loss picks.

“I think with better data being available, there is much greater confidence in how we can model attritional performance,” Davis said, adding that there’s also “great consensus” among reinsurers regarding views of risk, though regarding cat exposure “it’s a little different”.

“I think you have various models with different scenarios that each adopt and apply a different methodology,” she said, adding that version changes have had a tendency to create “swings” in modelled results.

“It’s really important as an industry that we take steps to provide feedback on the cat models,” Davis said.

She said Guy Carpenter is using “a multi-model view to smooth out” some of the model version change differences and to ensure it is working with clients to make the necessary “dial movement” to reflect their unique underwriting strategies.

“So we’re getting to a closer place, but I wouldn’t say there’s as much confidence on the catastrophic modelling side as the attritional,” she noted.

Davis said the scrutiny of cyber models versus property models can be “confusing at times”, given the history of model miss associated with property cat analytics.

Guy Carpenter released a study in March in which it concluded that models’ results are gradually converging over time as more credible data points become available for calibration and validation.

However, the broker said that a notable degree of variability across model outputs still exists, which can pose a challenge to insurance and reinsurance companies as they formulate a unique view of risk.

Watching for adverse development as claims tails lengthen

The emergence of breach class action lawsuits is adding to the length of time it takes for breach incident claims to settle.

Davis said her firm is closely watching for the potential for adverse development in older accident years, especially from the “pre-ransomware” era.

“We want to make sure that we’re accurately modelling and assessing that third-party development, which is what’s driving [the tail on claims].

“Especially with a heightened number of ransomware incidents involving data exfiltration, that’s going to be important to consider when we think of blending the first- and third-party development on these portfolios and across the market,” she said.

Davis said her firm at the 1 January renewal identified a theme of more capacity being available and “strong reinsurer appetite for cyber”.

She also said that insurers have grown more comfortable with absorbing attritional cyber losses and have developed a greater inclination to retain more business along with underwriting margin.

“So portfolios are performing well. The market’s become larger, the books are becoming more mature, so with time and with scale, they’re becoming more comfortable with the attritional components, so some cessions reduced at 1.1,” she explained.

QS cessions cut, non-proportional interest increasing

Conversely, Davis said her team saw an uptick in buyer interest for covering cyber tail risk and cat exposure, leading to an increase in the buying of non-proportional covers.

The other trend that the intermediary saw related to “diversified buying strategies”, including bringing in alternative forms of capital to support reinsurance risk.

“The event sets are becoming more refined and therefore able to attract additional capital,” she said, highlighting Guy Carpenter’s introduction of CatStop+ which provides “low-attaching cyber event cover” and aggregate stop-loss protection.

Davis said reinsurers have “definitely” become more sophisticated in their approach to cyber and investing in specialisation, not just in underwriting, but also in analytics and human capital.

“We now see reinsurers who routinely are accessing at least one cat model as well, so I think that the level of specialisation on the reinsurance side has absolutely increased in the last five years.”

Capacity for MGAs is also “increasing”, according to Davis.

“I think there’s better comfort with the MGA approach. There’s less perception on top-line focus being felt across the market,” she observed.

“I think there’s appreciation for the diversification that that MGA small business space can bring to the overall growth of the market and diversification across the book. So, I think MGA appetite is increasing,” Davis concluded.