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Cyber reinsurance in the "new normal"

05 Oct 2020

For the lucky ones among us, the cliché of the 'new normal' is embodied by upended work and personal lives, an endless string of video calls, complete with the eager or unwitting participation of two- and four-legged loved ones.

For cyber underwriters, the 'new normal' has a slightly different complexion: of course, I refer to the increased prominence of cyber extortion in our business. Ransomware losses have increased in both severity & frequency, a situation that some of our clients fittingly described as an 'attrition of large claims'. As the trend is still developing, the full impact is still unknown, but some reports have observed deterioration of 10 loss ratio points1.

Fortunately, the market is not sitting idly by, and rates have shown signs of strengthening since the fourth quarter of 2019, with accelerating momentum in the second and third quarters of 2020. This trend appears to bring an end to a long period of coverage expansion and rate weakening. However, it remains to be seen whether a year (or two) of rate hardening will be enough to offset this ‘new normal’.

What does that mean in the context of reinsurance?

Concerns around aggregation risk come up against availability of reinsurance capacity

A poll of industry experts during a recent panel discussion showed that the industry's chief concerns were ransomware (45.5%) and aggregation (41.6%)2. It's not surprising for ransomware to poll the highest, considering it is the first real challenge to underwriting performance seen by the cyber market in its young existence. Yet, it is in a virtual tie with aggregation risk, even though the market has never experienced a 'cyber cat'.

The concern around aggregation risk is reflected in reinsurance purchases, with our data showing the total limit of aggregate excess of loss cyber reinsurance placed (excluding retrocession) increasing from USD 1,500m to USD 2,000m from 2019 to 2020, an increase of about a third year over year. This follows a 100% increase between 2018 and 2019.

Source: Swiss Re, Reinsurance Cyber Centre

Increase in demand for such covers has outstripped the growth of the underlying insurance market for three years in a row, and unsurprisingly we have observed significant hardening in this space, starting at 1/1/2020 and accelerating with mid-year renewals.

The challenges of a depressed yield environment

With an average settlement time of around 3 years, and 90% of claims paid within 6 years, Cyber is generally priced & reserved as a long-tail class. What this means in practice is that underwriters are able to discount future claims payments and thus charge a smaller premium upfront. A simple observation of US Treasury 10-year yields over the last 12 months shows that the benefit of discounting has considerably reduced.

Source: US Treasury benchmark bond 10-year, Refinitiv & Swiss Re Institute

Furthermore, the tail of cyber insurance could shorten over time as extortion claims become a larger proportion of the expected loss and those are paid more quickly. We expect this compounding of tail shortening and yield deterioration to impact the economic performance of cyber portfolios significantly, by an average of 2 loss ratio points.

Proportional cyber reinsurance remains in high demand, but is under pressure

In 2019, we estimated the size of the market at USD 4.5 billion. This year, our assumption is that the market will grow by over 20% to reach USD 5.5 billion.  

Swiss Re data shows that proportional reinsurance for Cyber remains in high demand, with an estimated 40% of total Cyber premiums flowing from insurers to reinsurers through quota share arrangements. As this figure remained stable year-on-year, this means that reinsurers have broadly grown alongside their cedents.

Our data also shows that ceding commissions have remained stable between the 1/1/2019 and 1/1/2020 renewals. Considering the underlying growth of the market, this means that cedents' net position has comparatively improved, as fixed costs typically do not increase at the same pace as top line premium.

As a result, reinsurers typically enjoy thinner margins than their clients, which also means that they will suffer more from deteriorating loss trends.

Mid-year renewals have shown signs of the balance being redressed somewhat, with commission reductions being enforced across the board. However, reinsurers are still at a disadvantage and there still is a significant gap between ceding commissions and actual costs.

Some reasons to be hopeful, but still a lot needs to be done

It is undeniable that we are currently navigating turbulent waters.

There are also many reasons to stay upbeat. Awareness for cyber risks is increasing, new buyers of all sizes came to the market this year, despite the economic uncertainty brought upon by COVID-19.

Insurance carriers are showing discipline on rates and coverage. In view of loss developments and the political & economic uncertainty ahead, it is important that this level of discipline continues into 2021 and beyond.  

The negative effect of current cyber loss trends, shorter tail from extortion demands and lower investment returns puts reinsurance underwriting margins under extreme pressure. Despite a hardening of rates in the underlying cyber insurance market, these factors suggest that quota share ceding commissions & non-proportional rates will need to be adjusted in the upcoming 1/1 renewal.

At Swiss Re, we will continue to support our clients' cyber growth ambitions through reinsurance capacity, with both proportional and non-proportional treaties, as well as facultative reinsurance. We also develop solutions to support our client’s accumulation management and to help them build bespoke products for individuals or SMEs.

We also see the aggregation potential of Cyber means that there are limits to the insurability of the risk; therefore we intend to continue working with governments & financial markets to find long-terms solutions to make the world more digitally resilient.


  1. Aon, US Cyber Market Update, June 20202
  2. Net Diligence, State of the Market session, 30 June 2020



Baden Baden 2020