“Cyber itself is the opportunity”.
“We have a class of business that is going to outstrip GDP in terms of speed of growth by a significant multiple,” he said. “We are in a world where the value that exists within most companies is far more intangible than it is tangible. And yet, as a market, we sit here offering the same products that we offered many years ago. So, I do feel that cyber and other intangible products present an incredible opportunity for the future.”
Newman noted that this is playing out against the backdrop of cyber being poised to soon become much more prevalent in a range of different ways. Penetration rates for standalone cover may remain stubbornly low within the class, he said, but these are set to expand materially, particularly as capacity providers start to gain momentum in new areas such as personal lines cyber – and as business lines such as motor, shipping and aviation start to develop as cyber classes of business.
“While I certainly wouldn’t say [cyber] is immune to the same market cycles that the rest of the insurance industry is impacted by, it has many factors in its favor that are more beneficial to cyber than they are to other classes,” he said. “For that reason, it’s hard to over-capitalize cyber for a sustained period of time.
“Because in cyber, if you increase supply and you increase the amount of capital then that increases the investment you’re able to make into people, understanding, distribution and products – which leads to increased demand. That increasing supply/increasing demand is not something we see everywhere else and it’s a real negative in other markets, whereas in cyber, effectively it can be seen as a positive to help stimulate growth in the marketplace.”
It was the sheer scale of opportunity that first attracted Newman and convinced him to move across from the world of property cat reinsurance to immerse himself in the cyber market nine years ago. Now he runs a global team based out of offices in London, Zurich, Bermuda, New York and San Francisco, and he has first-hand insight into what has and hasn’t changed in the space.
When Gallagher Re’s cyber team was first established it was under the mantra of creating a greater understanding of cyber, from the original risk through to final capital. Alongside that, the emphasis has been on offering expertise around analytics, cyber security, threat intelligence and cyber consulting, and Newman is proud of the achievements the team has made under these objectives, which remains its core strategy.
What the Gallagher Re cyber team does is different as it spends “an incredible amount of time” on educating potential investors, getting them comfortable with the risks and therefore looking to bring additional capital into the space. The biggest challenge as a cyber reinsurance broker, he said, is how to attract enough capital into the market over the next decade in order to meet growing demand and support clients, both existing and incoming. This has been a key area of focus for the team for many years and remains central to its strategy.
“When I first looked at cyber, I recognized that it was a class of business that was likely to grow faster than other classes and be very dynamic as well,” he said. “At that time, I thought it could be done a lot better by [creating] a far deeper understanding of the peril and how to cover it than was being done in its existing format. And that still rings true today.
“One of the things we hypothesized right from the start was that cyber is going to be the most capital-constrained and most expertise-constrained class of business in the market. And so we focus on assisting our client base with those two key elements; whether it’s our expertise in helping them navigate the cyber landscape or whether it’s accessing the capital they need to support their own cyber ambitions – we want to be positioned to help them.”
The capacity and expertise crunch that was facing the market nine years ago is probably even more relevant today, given the scale of the cyber opportunity. Newman highlighted that if you have a class of business that is set to double every three or four years, then it is only going to get more challenging to ensure you have both the capital and the people required to support that growth.
“In simple terms,” he said, “if we’re using premium as a decent proxy for the number of people we’re going to need, and I appreciate there will be some efficiencies as the expertise grows, we’ll need twice as many people in the market in three or four years, and three times as many people after that. So we need to think about not only how we as a broker deal with that, but also how we support our clients in meeting that challenge.”
The same is true of the capital challenge, he said. Cyber is a systemic risk and while Gallagher Re is doing significant work in trying to demonstrate that there is meaningful disaggregation in cyber - in the same way that there is in property cat - until it’s able to demonstrate that effectively and empirically, there is a high correlation concern that will continue to limit the amount of capital that people are prepared to deploy in the space.
“At another conference, I was asked why we aren’t seeing more investors coming into this space,” he said. “And the answer is - because they haven’t done the work. They haven’t really sat down and given the amount of time it takes to really understand this class of business. Because those who have are genuinely participating in it, and the more understanding people have, the greater their level of participation.
“Overall, I think the fundamentals of cyber, over an extended period of time, make it more attractive than say property cat, the other big systemic class out there. And it’s very difficult to see a world in which cyber doesn’t outperform property cat over an extended period of time.”