Now’s the time for investors to “get a foot in the door” on cyber: Hannover Re’s Ludolphs
Speaking at a webinar hosted by cyber-focused MGA and Lloyd’s coverholder Parametrix recently, Henning Ludolphs, Managing Director at reinsurance firm Hannover Re, suggested that now is a good time for potential cyber insurance-linked securities (ILS) investors to “get a foot in the door”.
Ludolphs explained that it would be beneficial to “start small” in terms of volume, adding that from the pricing perspective, the timing is good due to levels recently increasing.
Outlining the potential ways to do this, Ludolphs highlighted proportional reinsurance (quota share), non-proportional structures (excess of loss or aggregate excess of loss) as well as the parametric approach.
“I do not want to say one of these forms of trend-sharing risk to capital markets is better than the other,” he said. “They have their pros and cons, and I think it requires individual assessment of the situation from every investor to see what makes sense.”
However, Ludolphs added, “Interestingly, if we look at the first 10 years of ILS business (in P&C), it was almost all catastrophe bonds.
“The majority were based on indices or parameters. The investors approached the ILS business by starting with parametric business, as it is short-term and transparent.”
He continued, “To a certain extent, you could use a similar approach for cyber. Start slowly with a small amount and with an index or a parameter just to get into the business.”
From Hannover Re’s perspective, Ludolphs states that the firm has been active in cyber since 2013.
He said, “With 600-700 million in premium income, I think we are a large provider, and I’m sure we will grow further and remain among the largest range of providers of cyber risk protection.
“In doing so, we want and need support from our retrocession partners. This could be on a traditional basis, but we are strongly looking at capital markets.
“We already work with capital markets a lot on life business and on P&C business in various forms, so the capital markets play as a natural partner for us.”
Hannover Re has already announced a cyber quota share transaction with long-standing ILS investor Stone Ridge.
On this topic, Ludolphs concluded that the next natural step for the firm would be the use of cyber cat bonds.
Speaking more generally on the cyber market, Ludolphs noted how it has expanded tremendously in recent years, and how that growth is expected to burgeon in the future.
He cited reports that it may triple over the next four to five years, adding that he thinks this may be a fair assessment.
However, Ludolphs did observe that cyber risks are more difficult to assess, as there is neither a long history nor have models had a chance to be repeatedly calibrated like the hurricane models in Florida.
Nonetheless, Hannover Re still sees cyber as “an opportunity to grow” for both the re/insurance industry and capital markets.
Henning Ludolphs joined Hannover Re in 1989 and has since focused his career on structured reinsurance transactions.
He has built up the firm’s ILS unit, with a focus on facilitating the transfer of third party reinsurance risks to the capital markets and on investing in ILS securities.
Ludolphs also recently told Artemis that Hannover Re hopes to sponsor its first cyber catastrophe bond soon.
