New capital boosts cyber diversification for reinsurance market

“Diversification is possible within a cyber portfolio, whether that’s insurance or reinsurance,” Jonathan Spry, founder and CEO of Envelop Risk, told Monte Carlo Today as he discussed how the reinsurance industry is aiming to stay ahead of the rising cyber threats.

Cyber risk and its unique challenges will take centre-stage in conversations around diversification and capital markets, according to Spry, who sees a pressing need for the growing cyber insurance market to evolve.

“Diversification is possible within a cyber portfolio, whether that’s insurance or reinsurance,” he said, pointing out that while geographical and industry-based diversification within cyber portfolios was achievable, in extreme cases however, some correlations were inevitable. 

“In the tail, you start to see more correlation, and some of the diversification impact probably begins to fade,” he added. 

Spry described how despite these risks, the company was “proactively seeking greater international diversification across our portfolios”, with a particular focus on emerging markets.

This strategic approach to diversification is underscored by Envelop Risk’s emphasis on growth in key regions, including the Middle East and Asia. 

Spry explained: “We’ve adopted a white-labelling approach—we call them cyber platforms-and that form of business is focused on emerging markets and growth.” 

He believes that this dual focus on expansion and diversification sets Envelop apart from many competitors, and shared how his team was actively working on “doubling down on growth in the Middle East and Asia” where there are significant opportunities to expand the firm’s cyber risk footprint.

How to bridge the gap

Beyond diversification, Spry is certain that attracting new capital to the cyber insurance space will be a central part of closing protection gaps and bolstering capacity. 

“We are looking to the capital markets, and there is a need for more capital, particularly as we start thinking about closing protection gaps.” 

This view stems from the broader industry challenge of securing enough retrocession capacity to support cyber reinsurance growth. 

While progress has been made in engaging capital markets investors, Spry acknowledges that it “is not a quick win” and requires education and patience.

Nevertheless, there are already tangible signs of capital market participation in the cyber space. 

“We’ve seen some cat bonds, and participation elsewhere, more on a sidecar basis,” says Spry. 

Envelop Risk has utilised insurance-linked securities capital to underwrite cyber risk through Lloyd’s, although not yet in bond format. 

“I’m not convinced that the private market is unable to respond to this.”

Spry expects to see more of this type of capital involvement in the future, as investors become increasingly familiar with cyber risk.

The potential role of government in addressing cyber-related protection gaps remains a topic of debate within the industry, Spry feels, and while some may argue for greater government involvement, he maintains that the private market is still very capable of managing these risks.

“I’m not convinced that the private market is unable to respond to this,” he said.

Although he is open to the idea of public-private partnerships in certain cases, Spry cautioned against placing the burden of large cyber-related losses on taxpayers.

“I suspect that it’s a bit of a fool’s errand to expect taxpayers to start picking up large cyber-related losses while the easier risks stay with the private market,” he said. 

He drew a distinction between cyber risk and other types of risk pools, such as flood or terrorism, where government involvement is more prevalent. 

According to Spry, the dynamics of cyber risk differ significantly, and the private sector is already adapting to the evolving threat landscape, particularly concerning state-sponsored malicious attacks.

“We’ve got our head around the war language,” he said, referring to the legal and coverage complexities surrounding cyber warfare. 

“We continue to function around state actor involvement, malicious and non-malicious threats every day.” 

Spry emphasised that while government backing could help reassure capital market investors, he expects the majority of the needed capital to come from private investors, not from taxpayers.

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