It is a fairly common trope in the insurance industry today – particularly since the tech crunch – to lump all insurtechs into the same bucket. For the naysayers, it’s a conveniently seductive miscategorization, framing insurtech as indistinguishable from both each other and the tech industry at large. It also grants the industry skeptics special pleasure in dispensing unsolicited advice to the upstarts with a clear conscience, secure in their own sensibilities. This reduction, lumping all insurtechs into a single bucket, conveniently overlooks the unique market dynamics of cyber, granting particular disservice to the cohort of technology-oriented cyber insurance providers that are inching closer to specialty carrier status each day.
To start with, the market dynamics that led to their geneses are significantly different. The cyber insurance market only existed in a limited form when the first cohort of pure play cyber insurance players emerged. The peril itself coming of age alongside, rather than before, them. Simply put, those who endeavored to underwrite cyber sought to build a market segment rather than cannibalize a saturated one.
This is an important distinction, and one that is perhaps best demonstrated by the rating environment of the 2010s. Where other lines of P&C business remained anchored to a soft rating environment, cyber was experiencing rate increases; it also had profitable loss ratios. With profitable industry loss ratios, rate increases are not typical. They can be driven, to a degree, by perceptions of the overall peril or aggregation risk, but this can only occur provided that the market itself is not awash in capacity; such was never the case for cyber, nor is it today.
The market demand has always outpaced the market supply (capacity). What this means is that in the instances where other insurtechs sought to disrupt established lines of business based on price and operational efficiencies alone, cyber was building both an innovative, more efficient and effective approach to underwriting through technology disruption. The reinsurance markets gained gradual comfort with the peril itself and slowly increased their support to the most disciplined underwriting shops, wielding their power as gatekeepers to the growth aspirations of early entrants.
It is worth noting that most, if not all, cyber insurtechs began as cyber MGAs. This entry point is not atypical; capital and regulatory requirements tend to be less burdensome for MGAs than that of a carrier. What is also paramount to the MGA entry point is capacity, which sits in eternal suspension through perpetual 12 month treaties. Loss ratio erosion and subsequent capacity exits have spelled the end for many MGAs. With every failed or wounded cyber insurtech by way of capacity reduction, loss ratios and pricing are more heavily scrutinized by those who grant it. For those who have successfully built their market partners, it has come through sufficient confidence in their value proposition. Even at the current state of the market, every cyber claim gets noticed at the executive level of every risk bearing entity.
Nonetheless, the trajectory of all insurtechs could have run in parallel. The carriers could have met the cyber demand themselves, the cyber MGAs could have been mere disruptors rather than market builders. The net effect would have forced the cyber MGAs’ hand into tech disruptors over augmented underwriters, competing on price and expenses first, and underwriting second. They instead granted the lion’s share of the market building exercise to the cyber MGAs. Today, they represent a significant share of the entire cyber market premium, an even more significant portion of the talent pool, not to mention the momentum with regards to innovation.
The final stage of cyber MGA maturation is now upon us as they are now committed to growing their shares of retained risk. Of the top three tech-driven cyber MGAs, all have a fully retained captive, have their own carrier, and at least two of them have active or in-progress sidecar; that is to say they all retain some levels of risk showing their commitment to not only help businesses transfer risk but also support these businesses in decreasing the likelihood of an incident.
The market dynamics of the following year will be paramount to these entities proving their value. The current dynamic of rating and claims activity is sure to test their underwriting efficacy. However, those whose underwriting model proves consistently profitable through this phase of maturation are perhaps well positioned to catalyze a seismic shift in specialty carrier market building: Insurtech MGA to Specialty Carrier.
They could also become a subset of the technology and insurance industries worthy of particular note.