Hannover Re looks to drive cyber beyond only proportional deals

Hannover Re comes to Baden-Baden in 2024 with an open mind on how to help cedants in need of cyber reinsurance, and willing to consider structures beyond the plain vanilla proportional covers that have underpinned the young market’s early stages.

That is according to Stefan Sperlich, managing director of the reinsurer’s newish cyber and digital business unit. Hannover Re will give “diligent consideration to every risk presented to us”, he told Baden-Baden Today. 

“If we can fully embrace the structure and pricing, we are willing to deploy capacity.”

At the end of March 2024, Hannover Re combined its global cyber and digital businesses to create a new specialty reinsurance business unit. Its aim was to enhance its position as a partner for insurtechs and clients seeking coverage for cyber risks in both treaty and facultative reinsurance. 

It said at the time that the move would allow it to benefit from a centralised approach on a portfolio level, giving it a better handle on diversification, accumulation and cycle management. It allowed Hannover Re to expand its data and analytics capabilities and scale its cyber retrocession capacities.

Sperlich, who joined Hannover Re in 2009 as a structured reinsurance underwriter, had been leading the North American structured reinsurance business. In addition, he formed and headed Hannover Re’s digital business accelerator for P&C business.

The willingness to consider different type of reinsurance coverage for cyber is a relatively vanguard stance for a top-tier reinsurer. Peers to date have stuck to relatively straightforward proportional deals, offering growth and diversification without the deep dive needed to offer other structures at scale.

Hannover Re signalled its readiness for change when it launched the new unit under Sperlich’s command. The new unit was “up and running” from the April date on a transition for cedants and brokers which “hopefully, they didn’t even notice”, Sperlich said.

Goals included an improved customer experience, “more consistent messaging” and a “more consistent view of risk appetite”. This was not about paring coverage, it was offering clients more options and readying for future demand.

Maturing cyber

The move came amid signs of the cyber market changing. “Cyber as a line of business is still a young adult,” Sperlich told Baden-Baden Today. “We are now diving into the next evolutionary stage.” 

The root cause of change, he believes, was started by the reinsurance side of the market amid a rising awareness and concern about the unknowns of the length of the tail. Cyber as a line has grown fast, supported almost exclusively by proportional treaty. The arithmetic around ultimate exposures had started to look exponential.

“Unlimited quota share is unlimited coverage and that is what we don't want to bind,” Sperlich said.

Other reinsurers might concur but have not yet stepped up to offer a broader array of structures, in Sperlich’s view. Over the last two years, reinsurers have mostly just demanded loss caps on quota share treaties. “I don’t think there is now a lot of quota share out there without a loss cap,” Sperlich said.

“We have a good mix of proportional and non-proportional.”

The result has been cedants left to manage the tail end of exposures on their own. Pricey stop-loss treaties haven’t filled the gap. “The next option might be non-proportional treaty, now in an exploration phase with more coverage requests, hitting the market,” he said.

Hannover Re has backed some market-renewable open placements. “We have a good mix of proportional and non-proportional,” he added.

Sperlich claims to have no limit on appetite for non-proportional treaties—at least, “not yet”—and has never yet rejected a treaty on account of the type of structure.

Excess-of-loss (XoL) deals could be one outcome of that appetite. For Sperlich’s stated goal of managing accumulations, the logic says to “steer our business to where we think we have best control over the aggregated tail”—a recipe for an XoL cat event limit.  

Early cyber XoL writers such as Hannover Re retain the driver’s seat, Sperlich suggests, able to “pick and choose” from a smorgasbord of structures and event definitions.

The market lacks the breadth of structures that allowed property-catastrophe to take off but does hint at “a kind of a convergence in the market for what is preferred and what is not”. 

“Of the deals that hit the market, some of them are not picked up by the industry, others are,” he said. 

Cedant demand, in turn, is less of a driver. Rather than pressing to retain more first-dollar premium via a shift towards non-proportional, the most confident cedants are instead negotiating hard on ceding commissions.

“Some are super-confident on their performance and asking for higher commissions. Others strategically want to secure capacity and are a bit more remote on commission requests,” Sperlich concluded.

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