Brokers have the run of the roost in the saturated cyber insurance market – holding carriers to ransom, forcing them to drop rates and underwrite clients at lightning speed in order to capture the market at potentially perilous rates.
It’s unsustainable, unhealthy, and irrational.
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That’s the view of Reza Khan, executive vice president of ThinkRisk, a New York-based MGA since 2010 that’s part of the
Ryan Specialty Group.
“Traditional small-middle market cyber right now, brokers are dictating everything, from compensation to expansion of terms to pricing. And that’s not healthy long-term for the industry,” he said.
“There are 100-plus markets in the US. Five years ago there were probably 20. That’s how bad it is. So when you have that much choice it puts the brokers in a highly leveraged position. When you have a 10-fold increase in markets over, let’s say, the last decade, there are a lot of choices out there.
“So underwriters that get approached by brokers to underwrite cyber placements … they [brokers] have a lot more leverage because they can say [to the underwriter], ‘hey, if you’re not willing to do it, I’ve got nine other calls I’m making after this.’ So if you’re not responsive right out of the gate to the brokers, they move on very quickly. They’re not looking back.”
In the past, in traditional insurance markets, there was a “natural friction” between brokers and the underwriting community, which was “a good thing in the negotiation process”, Khan said. “That’s gone, in the cyber market place. Completely gone.”
“The cyber marketplace is not doing this in a rational way anymore. It used to, when I started doing this years ago. It’s irrational at this point, and that’s scary from an underwriting standpoint,” he said.
“We haven’t done the level of underwriting that we used to, on some of this stuff. There’s no time. These things are rapidly quoted within a day. If you don’t get a quote on the street in a day, generally, you’re dismissed as being ineffective as a market. And how much underwriting can you do in a day?”
A lot of time, underwriters are basing their work off a renewal – which may just have six questions on it and is based on someone else’s initial risk assessment. So companies are taking big risks in order to keep up, Khan said.
“You’re basically taking a bet, bet on some renewal application questions from another market,” he explained. “How valuable is that going to be? It’s nuts. But it’s a growth area, right.”
But while carriers are clamoring for market share, taking on more and more customers, and therefore more and more risk, there surely has to come a point where the market corrects itself, Khan said. And that will come through losses.
Insurers are stretching themselves in the pursuit of client-base, he said.
“Where carriers in the past would only do a $3 million primary limit, or a $5 [million], they’re now putting out $10 [millions] more readily, for pricing that kind of reflects what they would have done for $5 million a year ago or two years ago,” he said. “For example, somebody that’s got tons of capital in the cyber market as a carrier would’ve put out a $50,000, $5 million limit policy, will make that a $10 million limit policy for $50,000. Within the last two years we’ve seen that happen, and that can’t work.”
Lloyd’s of London last week said a major cyber breach could easily cost as much as Superstorm Sandy – or more. We may not necessarily see that level of correction, but something needs to give, and lessons need to be learned for the market to right itself, Khan said.
“We need to see more losses,” he concluded. “We need to see more claims.”
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