WTW: Cyber Risks Pushing Insurers to Scale Cover

In an era of unprecedented global uncertainty, the insurance industry is recalibrating its risk management strategies with surgical precision.

Global insurers are therefore increasingly turning to facultative reinsurance – insurance purchased for individual risks rather than entire portfolios – as they navigate emerging threats from cyber attacks, climate change, and volatile financial markets.

A survey of 300 senior insurance executives by WTW, the global insurance broker and risk management firm, found that 68% plan to increase their facultative reinsurance purchases over the next two years. 

Cyber security's strategic shift

Insurers are increasingly seeking more nuanced approaches to risk management, moving beyond traditional treaty reinsurance's broad portfolio coverage.

This strategic shift reflects the growing complexity of contemporary risk landscapes, particularly in emerging technological domains.

Recent research highlights cyber insurance's paradoxical position in the market. It simultaneously represents a significant business opportunity and a substantial concern for 58% of industry professionals.

This ambivalence is propelling a demand for more sophisticated facultative solutions that enable insurers to engage with cyber coverage while maintaining precise risk control.

Armando Montenegro, Head of Facultative for Latin America at WTW, provides critical insight into this dynamic environment. "The rapid development of AI introduces unprecedented uncertainties," he explains. "As technology continuously evolves, we anticipate more carriers developing protective strategies for their clients, while cedents explore facultative cover to mitigate emerging technological risks."

The trend underscores a critical transformation in insurance: from standardised, portfolio-wide approaches to highly tailored, risk-specific solutions that can adapt to the technological landscape's rapid mutations.

Market evolution across regions

The North American insurance market is experiencing a notable transformation, transitioning from previously challenging hard market conditions to a more accommodating soft market environment. This shift has prompted insurers to actively pursue expanded capacity across various sectors.

Ivan Breen, WTW's Head of North American Facultative, highlights the prevailing uncertainty in the market. "Insurers are grappling with significant ambiguity regarding potential loss scales, particularly in high-volatility sectors like cyber and energy," he explains. These domains have experienced substantial financial impacts in recent years, creating a complex risk landscape for carriers.

The European market has maintained equilibrium between demand and capacity, supported by advances in data modelling. However, certain risks remain challenging to cover, including natural catastrophes in loss-affected countries and industries like waste processing.

The Asia-Pacific insurance market is experiencing significant challenges in reinsurance capacity, driving a strategic shift towards more flexible risk management approaches.

“But those treaties have become more restrictive over the last few years, so carriers are increasingly looking to facultative to fill the gaps.”

Market constraints 

Despite growing market demand, 56% of respondents identify limited capacity as a significant barrier to purchasing adequate facultative coverage.

The same proportion highlight high premiums as a substantial obstacle to market participation.

The survey reveals that 81% of insurers select reinsurance providers primarily based on available capacity.

Claims payment capability emerges as a critical consideration, with 80% of respondents emphasising its importance in provider selection.

Traditional insurance lines remain foundational, with property and casualty risks continuing to dominate reinsurance portfolios.

However, newer risk categories are gaining substantial traction. Environmental impairment liability now accounts for 47% of facultative purchases, professional indemnity represents 42%, and cyber coverage comprises 34% of the market.

The evolving landscape highlights increasing complexity in risk management, with US cedents reporting challenges in securing claim payments from newer, overseas reinsurance providers.

Financial ratings are driving significant demand in the facultative reinsurance market, with 55% of respondents citing rating improvement as a key motivation for purchases. This trend reflects heightened regulatory scrutiny and increasingly complex financial market requirements across the insurance sector.

The facultative arrangement landscape is characterised by substantial administrative complexity. The survey indicates that 59% of insurers identify complex negotiations and administration as coverage barriers, with this figure escalating to 64% in EMEA markets.

Additionally, 56% of respondents emphasise the challenges posed by reinsurers' extensive information requirements, which frequently exceed initial risk documentation.

In Latin America, where natural catastrophe exposure is intensifying due to climate change, insurers are strategically leveraging facultative coverage to address treaty programme gaps.

Technological transformation is simultaneously reshaping market sentiment, with 70% of Latin American respondents positioning artificial intelligence and automation among their primary strategic objectives.

Matt Nash, WTW Head of Facultative for Pacific says,"As demand for facultative cover increases, supply is likely to be limited. Cedents should focus on presenting themselves favourably to reinsurance markets, using the data they collect from clients to create more detailed and accurate submissions."

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