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Dedicated reinsurance capital rose by 7% in 2023 to $568 billion, with a further increase anticipated in 2024, according to a new report from AM Best.

Traditional reinsurance capital grew by $57 billion, or 14%, year over year, reaching $468 billion in 2023. This increase was largely driven by robust returns reported by Bermudian companies, with substantial capital growth, excluding Berkshire Hathaway’s National Indemnity.

AM Best projects continued growth in the reinsurance market through 2024, estimating total dedicated reinsurance capital for year-end 2024 at between $620 billion and $625 billion. This projection includes an anticipated 10% rise in traditional capital.

Despite these increases, since 2018, traditional reinsurance capital has accounted for less than 60% of the consolidated shareholders’ equity of companies identified as reinsurance writers, dropping to 49% in 2023 as reinsurers increasingly expand into primary and specialty insurance lines.

Third-party reinsurance capital saw a smaller increase of 3.7% in 2023, reaching $100 billion, according to the report. AM Best collaborates with Guy Carpenter to estimate the total capital supporting the reinsurance industry, with AM Best estimating traditional capital and Guy Carpenter estimating third-party capital.

The third-party reinsurance capital estimate for 2024 is projected to be between $105 billion and $110 billion, driven by growth in catastrophe bonds and collateralized reinsurance.

Dan Hofmeister, associate director at AM Best, noted that capital in the industry has grown rapidly due to higher retained earnings and reduced mark-to-market investment losses. He added that the absence of startup reinsurers has allowed traditional reinsurers to maintain their market shares without needing to adjust to softening conditions.

According to Hofmeister, the reinsurance market is well-positioned to handle a reasonable level of losses and continue growing capital.

The reinsurance market realigned during the January 2023 renewals following years of underwhelming underwriting and operating returns that did not meet the cost of capital. Some reinsurers exited the property catastrophe space, while others adjusted their risk profiles by raising rates and increasing attachment points.

This shift led to operating returns at levels not seen in nearly three decades. Through the first half of 2024, the property reinsurance market has stabilized, with slight softening at the highest attachment points.

AM Best forecasts that the reinsurance market will continue to thrive in 2024, with higher investment returns and similar underwriting risk positions to those in 2023. The market is expected to generate returns on capital exceeding 10% by year-end 2024, although these could be tempered by dividends and an active hurricane season.

However, the market appears capable of absorbing a reasonable level of underwriting losses while still achieving capital growth.

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Bermuda-based legacy re/insurer Compre Group Holdings has completed a legacy reinsurance transaction with Accelerant, a data-driven risk exchange platform.

The transaction, which has received approval from the Bermuda Monetary Authority (BMA), was underwritten by Compre’s Bermuda-based reinsurer, Pallas Reinsurance Company Ltd, and will provide approximately $150 million in coverage on loss reserves.

The portfolio involved in the transaction includes a mix of US and European property and casualty liabilities, covering Accelerant’s retention for the 2020 and 2021 underwriting years. Compre has also indicated that it will offer terms for future underwriting years as they mature.

The transaction was brokered by Augment Risk, with legal advice provided by the UK and US teams from Willkie Farr & Gallagher.

Will Bridger (pictured above), CEO of Compre, commented that the transaction demonstrates the company’s ability to create structured reinsurance solutions aligned with Accelerant’s strategic goals. He emphasized the ongoing partnership between the two companies.

Jeff Radke, CEO of Accelerant, also stated that the deal is an important step in the development of their Risk Exchange as they continue to innovate within the insurance industry.

Andrew Matson, CEO of Augment Risk, highlighted the significance of the transaction in establishing long-term retrospective partnerships and underscored the role of bespoke capital solutions within the insurance value chain.

Compre has also recently reported its financial results for 2023, marking the strongest performance in the company’s three-decade history.

Gross insurance reserves under management surged by 112% year-over-year, reaching $1.6 billion by the end of 2023, largely due to newly acquired reserves exceeding $1 billion. Invested assets totaled $2.4 billion, benefiting from locking in investment yields at the peak of the interest rate cycle.

Tangible net asset value increased by 67% to $784 million, and operating profit grew by 15% to $81 million. Profit after tax stood at $279 million, with an adjusted operating return on opening tangible equity of 19.9%.

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To commemorate reaching its five-year anniversary, Latin Re – the first Brazilian broker to secure a Lloyd’s licence – threw a celebration in São Paulo, drawing over 500 attendees, including insurers, brokers, and other industry participants from over 10 countries. The time and date chosen – August 8 at 8pm – was a deliberate representation of the firm’s ambitions, according to founder and CCO Felipe Aragão (pictured left) – because, by inverting the number eight, you get the infinity sign.

It has been a whirlwind journey for the business which obtained its operating licence in August 2019, enjoying only months of trading before the COVID crisis hit. “Ours is a success story but it has been a challenging one, which makes us even more proud,” noted CEO Maria Eduarda Bomfim (pictured right). Now, the firm’s focus is on the future as it continues to pursue an internationalization strategy, while further consolidating its brand in Brazil.

Latin Re’s internationalization strategy

Aragão highlighted that it’s a great time to be pursuing an internationalization strategy given how the market has evolved post-COVID. Where once it was a lot more formal and heavily reliant on in-person meetings, it has increasingly welcomed the accessibility of remote working, video conversations and emails. That’s not to say the market doesn’t miss an element of the personal touch, he said, and that’s especially true across Latin America where the emphasis Latin Re places on access to decision-makers is resonating strongly.

“So, we started our Miami operation last year, as well as obtaining our Lloyd’s licence, which has increased our demand not just from Brazilian wholesale but most of Latin American wholesale,” he said. “It’s a process not just of opening offices, but now obtaining licences all around Latin America. We’re doing something no other Brazilian company has done before which is doing business overseas but using our Brazilian licence.

“We were recently approved in Peru and we’re expecting the approval for Colombia and Guatemala. We’re already doing a lot of business in Mexico with local partners, and we are very confident that demand is coming from clients that have more of a Latin culture. And that includes both French and Spanish companies.”

What sets Latin Re apart in the market?

Central to the DNA of the firm is its commitment to serving as a marketplace for reinsurance, Eduarda Bomfim said, which means serving partners from all across the re/insurance ecosystem. Latin Re has established itself as a provider of solutions for the complex and specific needs of insurance and reinsurance entities alike. It’s quite a unique approach in that it sees the firm partner with companies which would traditionally be seen as competitors.

“But they are not competitors, because we are able to zoom in on specific and very niche needs, whereas the mega brokers don’t have the ability because they are washed out with so many demands and so many global programs and international institutional demands,” she said. “That goes to the DNA of what we’re building – as a solutions provider in the market, whether that’s retail, reinsurance, treaties or alternative alternative risk transfer.”

Growing a business without losing its shape

Eduarda Bomfim noted that when Aragão started the firm, he was meticulous in hand-choosing every single partner, including herself, and that they had all worked together previously at another brokerage. Having the right people early on inevitably lends itself to having a big will to succeed, she said, and they were each passionate about the opportunity that had opened up due to market consolidation.

Latin Re is on course to finish out 2024 with 60-plus people – having grown at a rate of about one key hire a month since its inception. Whether hiring on the operations, claims, or broking side of the business, Aragão and Eduarda Bomfim each highlighted that every care is taken to ensure they’re attracting and retaining the right people in order to grow quickly, without losing quality of service.

When it launched, the names of its partners were signifiers of its quality and ambition, Eduarda Bomfim said but five years on Latin Re is being recognized across the market. That puts it in a different phase of its growth journey because it’s now being reached out to by people who would like to join the business. Aragão highlighted that the company has also reached the stage where it has appointed its first partner from inside the team, and not outside the company – and projects to have its first ‘home-grown’ partner in the next 12-24 months.

What’s next for Latin Re?

As for what the future holds, he shared that when Latin Re started, its goal for the first two-to-three years was to be the best Brazilian reinsurance broker. It was only when it had enough people that it was able to spot where it differentiated itself from the rest of the market and could add further value to its partners across the re/insurance market. It’s still part of its ambition for the future, but only part of a growth objective that has evolved and changed as the business has done the same. “We are not sales company,” he said. “We are more of a service company.

“We focus on the service, we focus on the demands of our clients and we adapt very quickly to their changing expectations. We really believe that in the next five years, we’re going to have a big effect among the Iberia and Latam regions. And hopefully, we will be as recognised across that whole region as we currently are in Brazil. So, our 10-year party is going to have to be a lot bigger than our five-year party!”

Puerto Rico-domiciled insurers are expected to manage losses stemming from Hurricane Ernesto’s storm surge, power outages, and flooding, with the most significant impacts observed in the island’s eastern and central regions, according to a new commentary from AM Best.

However, the report indicates that it is still early in the claims handling process. Initial feedback from insurers suggests that property losses will be moderate and are likely to remain within reinsurance limits.

According to discussions with AM Best-rated companies, the majority of the damage has been caused by storm surge and flooding, the latter of which is not typically covered under standard homeowners’ policies.

Jason Hopper, associate director of industry research and analytics at AM Best, noted that the processing of claims could be delayed due to widespread infrastructure issues and power outages across the island. Supply chain and transportation challenges are also further complicating the situation.

Hopper also highlighted the uncertainty surrounding the extent of business interruption losses, given the ongoing power outages in Puerto Rico. Many local carriers that underwrite commercial policies and offer power outage endorsements have reported that a significant number of policyholders do not include this endorsement in their coverage.

Before Hurricanes Maria and Irma, premium growth in Puerto Rico had been stagnant for years. However, since then, net premiums written (NPW) have increased by nearly 6% annually on average, except for a slight decline in 2020.

Additionally, unaffiliated Puerto Rico-domiciled companies have taken a larger share of the total NPW, accounting for nearly 78% in 2023, up from 68% in 2018.

Since 2017, premium ceded by these companies to reinsurance firms has more than doubled. While some companies have reduced their exposures due to a reassessment of risk tolerance in response to rising reinsurance costs, renewals for 2023 and 2024 have been less turbulent, and rate increases have moderated in 2024. Insurers have indicated that, to date, losses from Hurricane Ernesto are expected to remain within reinsurance limits.

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The role of discipline in creating a sustainable reinsurance market has been the overriding theme of reinsurers’ H1 2024 investor presentations and results debriefings. As hurricane season heats up – and the market braces for an “unusually active” season – this emphasis on consistency is unlikely to reduce, not least because of the pressing need for the reinsurance industry to build a strong track record as a “good custodian of capital”.

The pressure is on reinsurers to build up their credibility – however, in a recent market update with Re-Insurance Business, QBE Re MD Chris Killourhy (pictured right), also highlighted the need for insurers to showcase the value they place on consistency. With that in mind, over the last 18 months, QBE Re has been on a journey of reducing its client count quite significantly. “There’s nothing wrong with this approach but some clients do want to focus on trying to change what they buy each year to get as low a price as possible. That’s a totally valid business model, it’s just not where we want to play.”

The changing premium placed on consistency

What has become clear since the team set out its strategy is that there are a lot of clients who recognize the benefits of consistency and would rather pay a sustainable price and know the cost of what they buy year-on-year. Having a better understanding of the cost of what you’re buying allows for the creation of a more sustainable marketplace in the long run and removes the dread that comes with pricing uncertainty.

Following a boom-and-bust cycle makes for significant uncertainty and there are very few industries that can run sustainably while navigating sharp pricing shocks. “We’re finding there is a really healthy dynamic appearing in the market, generally speaking, [across] insurers, reinsurers and third-party capital,” he said. “We’re less competitors now, rather we’re all looking to play a role in the linking of risks to capital. We’re just playing slightly different roles. I think the days of trying to work out how we can keep as much of the value to ourselves are probably moving on, and we’re all just looking to be more sustainable.”

RVS in Monte Carlo – what’s leading conversations?

Inevitably, what dominates discussions in the reinsurance industry is subject to what’s shaping the broader risk environment and, looking ahead to RVS in Monte Carlo, Killourhy said he expects to see a lot of discussion around property-cat. No matter how much market players try to expand the agenda, property-cat tends to dominate for one of two reasons – either there has been a big loss, or there hasn’t been, and people want to discuss what that means for pricing.

“I think the reinsurers will be looking to just confirm that this discipline and pricing piece is going to stay,” he said. “I think the days where we think that the cost of what we’re selling is claims is moving away. If we have a clean or relatively benign cat year, and we make a profit, we’ve got to look at what our investors are looking for.

“The real cost for them is the capital that’s tied up with a reinsurer and they need to make sure they’re getting a return on their capital, as compared to doing something else within. So, I think we’ll all be looking to see if that discipline is going to remain, and whether our buyers are still on the same page with regards to wanting a sustainable industry in the long-term and to see less fluctuations in prices.”

Man-made catastrophe exposures – a changing emphasis

Killourhy also expects to hear more discussion around man-made cat than there has been in the past on both the buying and the selling side of the market, particularly given the geopolitical uncertainty being seen around the world. “I think the selling side are trying to get comfortable as to what coverage we’re giving. And on the buying side, it’s about understanding what protection is out there for the non-cat side of property.”

On casualty, he anticipates that RVS will yield conversations about the prior-year development that a number of companies reported in their half-year results – and the extent to which the market should or shouldn’t be reading into what this prior-year development tells it about more recent years. “I think insurers and reinsurers are having to give credit to the re-underwriting of portfolios.

“With a lot of the adverse prior year development we’re seeing, there’s a strong argument that underwriting on the primary side has changed significantly since then, both from a rate point of view and with regard to terms and conditions. I think there’ll be discussions around where we’re seeing the evidence of that, and what are the proof points that we have seen a watershed between the underwriting that’s driven the prior year development and where are now.”

Carlos Wong-Fupuy (pictured above), senior director at AM Best, discussed the findings of a recent report, noting that despite global challenges in benchmarking due to the adoption of IFRS 17, the reinsurance segment continues to expand. Returns on equities in the sector are also expected to remain well above the cost of capital.

When asked about a key theme from last year’s conference, Wong-Fupuy highlighted the increased market discipline among global reinsurers, particularly in property pricing for the primary market.

In an interview, he also noted that the shift began with the January 2023 renewals, which occurred in a relatively dislocated market, putting pressure on primary insurers to adjust their portfolios. The outcome was a noticeable increase in market discipline.

Wong-Fupuy explained that initially, the reinsurance market saw a gradual repricing and de-risking of portfolios. By 2023, a significant change was evident, reflected in the results. Return on equity (ROE) for several companies in the US and Bermuda exceeded 20%, and these strong results continued into the first and second quarters of 2024.

While European reinsurers reported slightly different outcomes due to IFRS-17 adoption, key performance indicators are trending positively. Reinsurers have exerted pressure on primary carriers to improve portfolio quality.

Looking ahead, Wong-Fupuy expects this market discipline to persist longer than in previous hard cycles. He attributed this to a lack of capital depletion, as the market remains well-capitalized.

Investor pressure to improve returns, stemming from underperformance in prior years, is expected to sustain this discipline for at least a couple more years, contributing to the positive outlook assigned to the global reinsurance segment.

Challenges for global reinsurers

As the industry moves into 2025, Wong-Fupuy acknowledged several challenges. Strengthening in US casualty books has been observed, particularly in underwriting years 2016 to 2018. Although changes in underwriting practices have been made since 2019, it’s still early to determine the full impact. Increased attention is being paid to underwriting quality, risk selection, and pricing to address these challenges and reduce uncertainty.

Wong-Fupuy also mentioned the ongoing hurricane season, with forecasts predicting above-average catastrophic activity. While there may be limited room for pricing improvement, the impact of this activity on terms, conditions, and attachment points remains to be seen. The cyber insurance market continues to expand cautiously, with mixed views on risk levels and pricing adequacy.

Regarding reinsurance capacity, Wong-Fupuy highlighted that this hardening cycle differs from previous ones, as the market has remained well-capitalized without major catastrophic events eroding capital. Unlike past cycles, there has not been a surge in new company formations. Instead, capital generation has largely come from profit retention. Companies are improving their risk profiles, and some of the largest players are expanding and deploying capital more efficiently. There is no shortage of capacity, both in the traditional market and on the insurance-linked securities (ILS) side.

Wong-Fupuy noted that after several years of stabilization below $100 billion in ILS capacity, the market is now estimated to exceed $100 billion, reaching around $105-106 billion. He emphasized that ILS is not a competitor to the traditional reinsurance market but rather a partner and an essential platform that many traditional reinsurers use to expand their business.

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Markel has appointed Grant Smith (pictured above) as director of marine & energy liability for its international specialty division, effective immediately.

The company highlighted Smith’s appointment as part of Markel’s ongoing efforts to strengthen its international specialty underwriting capabilities, following the launch of its international specialty practice in December of last year.

Smith brings more than 17 years of experience in the liability insurance market, having held various underwriting and leadership roles. He joins Markel from QBE, where he most recently served as portfolio manager specialty for QBE European Operations, managing a wide portfolio of international marine business, including liability, hull, and P&I classes.

Before his time at QBE, Smith worked in underwriting roles across marine and aviation at Travelers, beginning his career in the industry.

In his new role, Smith will lead the marine & energy liability team within Markel’s international wholesale business. He will be tasked with driving growth initiatives that align with Markel’s long-term strategic goals. He will be based in London and will report to Tom Hillier, managing director of international specialty at Markel.

Hillier noted that clients are currently navigating a challenging environment due to economic inflation, changes in regulatory and legal frameworks, and emerging technological and climate-related liability risks.

Hillier also highlighted that when the specialty practice was established within Markel’s International Wholesale business last year, the company set ambitious goals for the marine & energy liability team, focused on achieving sustainable and profitable growth and establishing leadership in underwriting and service.

“I’m therefore delighted to welcome Grant on board to lead our marine & energy liability team. I’m confident his background and experience will position him to lead the team to deliver on our ambitious goals for this class of business and provide a superior service proposition to our clients and brokers,” he said.

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The full extent of the regulatory risk facing C-suite executives was laid bare in a report published by Gallagher earlier this week, which highlighted the operational, legal and administrative burdens these risks can incur. Citing statistics from the UK Centre for Policy Studies, the research noted that annual net regulatory costs for businesses have increased by £6 billion while executives look to manage and mitigate these costs in the context of a fast-evolving business environment.

Considering the capacity of regulatory risk to restrict a company’s ability to conduct business, how aware are directors and officers of the risks they face – and what is the role of the broker in helping to manage their exposures?

Understanding the full extent of D&O risks

Sharing his perspective as someone who joined the broking market after some 15 years working with Chubb and AIG, Steve Bear (pictured) said it’s an “eye-opener” to see how many clients don’t necessarily understand the fundamental building blocks of D&O. Now almost five years into his role as executive director of financial & professional risks at Gallagher, he highlighted that across the full spectrum of clients his team supports, there are executives who don’t fully understand the D&O cover they’re buying or, and more worryingly, the full extent of their own exposures.

“It’s not just the more nuanced aspects of this that are being missed, it’s also the simple ‘D&O 101’ things – like understanding that if you’re a director of a company, your liability is not limited,” he said. “I’ve met clients that don’t necessarily grasp that, which is why I think it’s so important to have these discussions and to put in place the right education about this risk and how it can be managed.”

What’s keeping D&O clients awake at night?

In terms of what he’s hearing is keeping D&O insurance clients awake at night, Bear noted that financial pressures have long been the “cornerstone” of D&O claims, as the vast majority of these tend to find their roots in some form of a financial loss. Whether it’s a lender who hasn’t been repaid, a customer who hasn’t seen contracted through to completion, or a shareholder who has taken a hit due to a drop in share price, there’s often a strong financial component to these claims.

How D&O trends are evolving

In addition, there is a trend away from strictly financial-led claims and the growing focus on business activities, as shaped by the regulatory lens that sits around them. “We increasingly see underwriters really looking at wider ESG factors – in fact, drop the ‘G’ because good governance has always been highly important. It’s the ‘E’ and the ‘S’ that clients are actually more concerned about now,” Bear said.

Gallagher’s report into ‘Navigating Regulatory Risk’ revealed that 62% of senior leaders at large UK businesses are concerned that their ESG targets put them at risk of litigation. Meanwhile, 72% admitted they felt pressure to set these targets without a concrete game plan of how to achieve them and 54% believe legal action over missed ESG targets is far more likely now than a decade ago.

It’s unsurprising that environmental risks have risen to the fore, he said, as climate events and climate change have been front-page news, attracting the attention of media, government and investors alike for some time now. However, he is seeing that it’s actually the social factors that are proving the most difficult for D&O clients to wrap their heads around because the exposure is poorly defined and, as a result, can seem quite limitless. “As an example, it’s hard to grasp that you are responsible for your entire supply chain when you’re manufacturing goods and you have a duty to make sure every component part is sourced from a good supplier who has maintained good working practices.

“Then there’s also the level of social outrage – fuelled by social media – that can follow any kind of bad corporate behaviour or even just unfortunate corporate events. The reality is that companies can and do go bankrupt. Competition dictates that in a free and open economy, not every company will succeed. But there’s outrage over a company failing while directors are well paid, or over the government not stepping in to rescue jobs. Ultimately, the buck stops somewhere and it’s normally at the boardroom door.”

Non-executive directors and the risks they face

Once upon a time, taking up a few NED positions was the logical next step for executives reaching retirement age and looking to keep their hand in the corporate world. “In times past, it was quite a cushy little number but now, regulators are cutting their teeth and looking beyond the main exec board to establish checks and balances among these NEDs who are supposed to be independent and call out when something is too risky, or the business practice isn’t sitting right,” Bear said.

Adding commentary to Gallagher’s recent report, Bear noted that increased regulation poses a ‘double-edged sword’ for D&O insurers. While it’s easy to assume that more regulation means more D&O claims, he said, without a codified set of rules to follow, “companies and their directors are left to their own devices and best endeavours, which creates a lot of uncertainty.” Certainly, he said, his team are seeing that the purchasing decisions around D&O insurance are being driven as much by NEDs as the main board.

“We’ve had clients phoning up to say they’ve had some investment and they’re putting a new NED on the board who’s asking they buy D&O cover, and they want a quote,” he said. “It’s understandable that NEDs are increasingly concerned about their exposure but the main board is likely to be the first target which may use up most of the limit leaving non-execs having to fund their own defence.

“And it’s normally after the main board has been investigated that the regulators or the claimant will move onto how the NEDs didn’t stop the main board from making a mess of things. And when bringing a claim against them, often there’s very little limit left.”

Insurtech provider Zywave has released the results from its 2024 Broker Services Survey, which offers insights from employers across the United States regarding their primary business challenges and expectations of insurance brokers.

According to the survey, nearly 92% of employers believe their business outlook for 2024 is either comparable to or better than the previous year. Additionally, close to 86% of respondents reported satisfaction with the services provided by their insurance brokers.

Patrick Noonan (pictured above), Zywave’s vice president of content development, noted that while consumers, including insurance buyers, are demanding, the majority of respondents are satisfied with their brokers’ services.

He also emphasised the importance of brokers remaining attuned to their clients’ evolving challenges and needs to maintain strong relationships and client retention.

The findings from the 2024 survey align with trends from previous years, indicating that employee attraction and retention, compliance, and technology remain critical areas of focus for employers.

Nearly 83% of respondents expressed a desire for consistent communication with their brokers, with weekly or monthly updates on specific insurance topics, highlighting the ongoing expectation for prompt and effective service.

In 2024, employers placed the highest value on client service and a broker’s expertise in their professional relationships. When selecting a broker, 57% of employers prioritised the ability to provide prompt and effective service, along with timely responses to their questions.

Additionally, 53% of employers sought brokers who act as trusted advisers rather than merely salespeople. Other important criteria included the ability to negotiate renewals, valued by 48% of respondents, and the provision of compliance resources, which 33% of employers considered significant.

The survey also asked employers to identify their top concerns related to insurance. Financial considerations and policy coverage emerged as leading issues in both employee benefits and commercial insurance.

Employers cited mitigating health care costs, offering a competitive benefits package, and attracting and retaining employees as their primary challenges in the employee benefits area. In terms of commercial insurance, understanding the appropriate level of insurance coverage, affording insurance, and implementing risk management and employee safety strategies, policies, and procedures were identified as the main concerns.

Noonan remarked that the survey responses suggest employers continue to face many of the same challenges as in previous years, with the current insurance market conditions increasing pressure on brokers to deliver a higher level of industry knowledge and expertise.

Zywave has conducted the Broker Services Survey for over a decade, aiming to provide brokers with valuable insights to help them prioritise their services and address their clients’ most pressing business challenges.

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While the full ramifications – economic and legal alike – have yet to be entirely mapped out, across the reinsurance and insurance markets attention has already turned to what the recent CrowdStrike systems failure means for the future of cyber risk. During a market briefing, Erica Davis (pictured), MD and global co-head of cyber at Guy Carpenter, highlighted how, from a reinsurance perspective, the global tech outage had the potential to be, “the cyber catastrophe the industry has spent a lot of time focusing on but hadn’t yet experienced.”

How the reinsurance market readied itself for the CrowdStrike outage  

“So, we braced ourselves,” she said, “for how big the loss would be, how long the downtime could last, and, from a reinsurance perspective, how many reinsurance cat covers could potentially respond. Instead, this loss was actually fairly contained. In fact, according to Guy Carpenter’s analysis, less than 1% of all companies globally were impacted.

“Now comes the billion-dollar question – how big is cyber catastrophe when events like this occur. The estimates for CrowdStrike have been fairly wide ranging. Fitch reported financial loss up to high-single billion-dollar digits across the overall market. Cyber modelers have indicated a range between $400 million and 1.5 billion. And last week, Guy Carpenter released our estimate of $300 million to $1 billion in loss, and that’s to the cyber market, which would equate to about two to six points of industry loss ratio.”

What concerned the reinsurance market most about CrowdStrike?

Davis noted that the universal reinsurance market consensus is that the loss is “sizeable but manageable”, given the market’s $15.5 billion size. Identifying some of the key reinsurance market concerns, she has seen triggered by the event, she pinpointed how its potential severity has reinforced the need to understand digital supply chain interconnectedness.

Secondly, the aggregation of the losses, particularly when it comes to business interruption and contingent business interruption have been notoriously challenging for the market to underwrite. “In cyber, those supply chains can appear seemingly opaque, so there’s a lot of focus in terms of understanding those impacts,” she said. “Thirdly, we need to understand the loss difference between malicious and non-malicious and how that translates to financial loss.

“One example is that the profile of an accidental outage lacks some of the loss components that we see in a malicious event, and that brings down the industry loss estimates as to how these cyber losses could potentially model.”

Was CrowdStrike included in cyber vendor scenario catalogs?

Addressing whether this event was included in the cyber vendor scenario catalogs, Davis noted that, “it was and it wasn’t”. Some cyber catastrophe models have included non-malicious intent, whereas others have focused more on malicious intent. That means there isn’t a scenario footprint that’s easily translatable to how this outage occurred.

However, she said, existing models can form a basis for how the market thinks about or derives an industry loss estimate. To do just that, Guy Carpenter took a number of scenarios, and applied some bespoke ‘scalers’ to mimic the July outage severity and footprint. It then also tracked some of the technological dependencies that it was able to access through various vendors, allowing it to formulate an estimate for how to think about events that aren’t directly available in the cyber cat vendor scenario catalogs, and so better understand how this event occurred.

“Lastly,” she said, “in the reinsurance landscape, all of this contributed to a shifting view of cat risk. As the cyber industry continues to mature, I think we have to reevaluate how we’re thinking about cyber catastrophe. It may not be the super single cat event that we’ve expected in the past, and instead, might be a series of ‘kitty cats’ or smaller to mid-sized catastrophe events that aggregate throughout a single policy or treaty period.

“That’s what we’ve experienced so far over the last 12 to 24 months, and will become an increasing focus for the industry. So as the industry grows, the market understanding of large market-moving systemic risk, alongside these more frequency-driven, small to mid-sized events, is going to help us evolve our understanding of cyber risk and underwriting for the future.”

Is the re/insurance industry prepared to deal with ever-evolving cyber risk?

Offering insights into how well appointed the insurance and, in turn, the reinsurance industry is to deal with the growing and changing face of cyber risk, Davis said she sees the market is currently well equipped. As the market has matured, cyber writers have become increasingly comfortable with this attritional risk i.e. non-catastrophic day-to-day exposures. For that reason, reinsurance buying strategies have shifted in the last 12 to 24 months.

“In parallel to that,” she said, “what we’ve seen is risk tolerances recalibrate. There’s been a lot more focus on catastrophic covers, allowing cyber writers to retain more margin and focus instead on protection for the tail. All that means there’s a growing range of reinsurance structures that are available in the non-proportional market and that are commercially viable. Some examples of those are industry loss warranties, cyber cat bonds and event covers.”

Applicable to many of the structures and especially on the event cover side, Davis emphasized the importance of the market taking a close look at cyber catastrophe event definitions. Currently, there are over 25 different event definitions existing in the market, and with each of these events – big and small – it’s important, as a market, to stress-test these definitions.

This will allow the market to understand the limitations of gaps of these definitions, allowing it to refine its approach and to create bespoke, customized wording that reflects each client’s view of risk. “That’s really important as a market, because we need to understand what sort of basis risk exists when we’re starting to craft these catastrophic covers. Overall, the market’s well prepared and we’re equipped to deal with these sorts of events. We’re learning so much through the modeling, and we’re creating more effective, suitable structures in order to protect the capital of these cyber writers.”