While capacity remains plentiful for standalone cyber reinsurance, tail layers remain expensive due to high capital charges, model uncertainty and systemic risk, prompting a search for more efficient structures, with Gallagher Re arguing that blending cyber tail risk with uncorrelated property catastrophe exposures in shared-limit structures could materially reduce pricing by lowering capital requirements and improving diversification.
According to the global reinsurance broking and advisory firm’s new white paper, “Cyber and Property Combined Covers: Buying the Tail More Efficiently,” the cyber insurance market has doubled in size globally, with gross written premiums rising from $8 billion in 2020 to $16 billion today.
This rapid expansion is driving growing demand from insurers seeking more efficient ways to protect against extreme cyber tail events.
Gallagher Re noted, “We have long identified cyber risk as a potential driver of volatility for re/insurers, and hence of their capital levels.”
The firm added, “In other words, if there were a large-scale cyber catastrophe, it could impact re/insurance balance sheets in a similar way as an unexpectedly severe natural disaster — albeit the quantum of losses would likely be much smaller.”
Insurers are reportedly well aware of these risks, and Gallagher Re expects demand for cyber excess of loss (XL) tail protection to grow materially in the coming years.
As evidence of this trend, the firm’s white paper highlighted a recent market milestone, stating, “As an illustration, at the 1.1.26 renewal we saw — for the first time — the purchase of a $1bn Cyber XL tower.”
The white paper raised a strategic question for the market whether cyber tail protection should continue to be purchased as a standalone solution or integrated with other tail covers within combined reinsurance structures.
Gallagher Re added, “The reinsurance market has been willing and able to provide cyber XL coverage, particularly in an environment of excess capacity. We have seen significant growth in the amount of limit available, while at the same time prices have continued to fall.”
“Nevertheless, for tail risks, reinsurers continue to charge a disproportionately high multiple of expected losses (EL), and minimum rates-on-line remain stubborn in the standalone cyber market to allow for the inherent tail uncertainty.”
“As brokers, we have been keen to find ways that our clients can buy cyber tail risk protection more efficiently by combining it with uncorrelated risks. We have developed a structure that combines cyber with property cat in a shared-limit XL layer, which can secure capacity at a meaningfully lower rate-on-line than could be achieved by buying either on a standalone basis.”
According to Gallagher Re, its analysis shows that combining cyber tail risk with property catastrophe risk in shared-limit structures can result in materially lower pricing.
This is achieved through reduced capital requirements, diversification benefits, and lower risk loads.
The firm also highlighted the growing role of insurance-linked securities (ILS) and cyber catastrophe bond markets in diversifying the capital base and supporting rising demand for cyber tail protection.
Ian Newman, Global Head of Cyber at Gallagher Re, commented: “As the cyber insurance market continues to grow, insurers are facing increasing challenges in managing their exposure to extreme tail risks.”
He added, “By leveraging diversification benefits and exploring opportunities in the ILS market, we can help our clients navigate this evolving landscape and build resilience for the future.”
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