Specialty treaty demand on the rise

Cincinnati Re’s head of specialty reinsurance Bill Lazzaro highlights specialty treaty opportunities.

What is the business mix for your specialty treaty portfolio?

In 2020, Cincinnati Re’s specialty treaty book represented more than $50mn of net written premiums, or around 17 percent of our total portfolio. Our specialty book has a nice variety, which helps to create optimal spread of risk across classes while also managing to specific downside scenarios that could impact multiple classes of business. 

Our portfolio includes marine and energy, cyber, mortgage, terrorism and crop. We also write personal accident, contingency, aviation, surety, political risk and trade credit.

Where do you expect to see new specialty treaty opportunities?

Cincinnati Re enjoys the strong financial backing and top-tier financial strength ratings of The Cincinnati Insurance Company, which gives us great access to business. We’ve steadily been increasing our average line size and we have also grown the team, adding expertise in niche areas.

Cyber is one area where we have seen more opportunities to grow while managing to a known and absolute downside. We continue to invest in our analytics and underwriting capabilities for this class.

We’ve seen more opportunities for crop business, especially in regions such as Canada and Europe. And there have been several opportunities in markets such as political violence, marine and cargo, as well as upstream and onshore energy lines.

The reinsurance market in general is anticipating growth in two specialty segments: infrastructure development opportunities in areas such as renewable energy and surety, both in the US and internationally with more opportunities tied to ESG-related strategies; and in the event cancellation and contingency space

Where is the biggest need for rate among specialty classes?

In our view, all specialty classes need rate to keep pace with inflation and loss trend, but cyber needs it most.

Cyber also needs changes related to data standards, product development and reinsurance contract wording. Through 30 June 2021, we’ve seen dramatic, positive change in underlying rates and risk selection, but we still question whether it is enough to keep pace with the evolving threats. Cyber quota shares, for example, continue to be restructured as a result of these changes and the lack of pricing for systemic risk – the “known unknown”.

As a market, we need more standardised data and detail on each underlying insured’s cyber hygiene to differentiate clients more clearly. Without more granular detail, portfolios are managed on a total limit exposed basis, which constrains any ability to confidently diversify risk and to attract the necessary supply of capital to the class.

The specialty treaty market also needs to focus more on clear contractual terms and conditions, rather than accepting that what has been done in the past will work going forward. Although we attempt to avoid peak zone natural catastrophe risk within our specialty segment, anything with catastrophe exposure needs material rate. 

Is demand for specialty treaty reinsurance solutions increasing?

Yes, we see demand increasing because of underlying portfolio growth and the desire of cedants to leverage more reinsurance capital. Many of the top brokers have also done an excellent job of developing new products, particularly around emerging risk, technology, cyber and other financial products.

In cyber, quota share is the largest reinsurance product, but as the market evolves, demand for XoL cover and retro is starting to expand, and we see that continuing at a rapid pace.

There has also been MGA and start-up activity looking for insurance paper and reinsurance support.