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Cyber market in ‘uncharted territory’: Hudson CEO Gallagher

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The cyber market is “hard and it’s getting harder”, as higher pricing for reinsurance and tighter reinsurance capacity has put increasing strain on the underlying market, according to Hudson Insurance’s CEO Chris Gallagher.

Speaking to this publication, the executive touched on a range of topics, including the appeal of the fronting market, daunting inflation dynamics in commercial auto and the importance of cycle management.

“The cyber (re)insurance market is dramatically more hard,” the executive explained, detailing a dynamic that has captured the industry’s attention for more than 18 months.

Hudson supports a cyber-SME program of business underwritten by Corvus but began excluding middle market risks from the program after the pricing for excess of loss reinsurance became prohibitively expensive, choosing instead to narrow its focus to small business insureds.

Gallagher compared the current cyber market to underwriting catastrophe risk without any underlying historical data.

“If you have a cat model for earthquakes or for hurricanes, you’ve got earthquakes you can look at. You can look at a lot of hurricanes and the geological data, and say, ‘I'll go avoid zones in San Francisco where soil liquefaction is an issue,’” he explained. “You can underwrite.”

“When you look at the modeling for ransomware, [and you] look at the monoline cyber we've written, it's like: ‘nothing, nothing, nothing, and then boom’.”

Part of the challenge, Gallagher explained, is that catastrophic cyber is a new cause of loss. “It was always there”, he said, “but in a very minor way”.

The executive’s comments come not long after broking giant Marsh reported that US cyber insurance rates increased by 96% in the third quarter, a 40-percentage point surge from the second quarter.

“We are in uncharted territory,” Gallagher continued. “There is, in my view, no reliable [data] where you would bet the farm on what we know is the downside from the ransomware epidemic.”

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He said his company has managed the higher risk by tightening coverage, lowering limits, and increasing pricing, but also being more fastidious in frequently pulling its own claims data to keep its pricing up to date.

Timing the cycle: Other carriers ‘have left an open field for us’

Gallagher oversees a specialty insurance company that wrote $1.87bn premiums in 2020 and is expected to top $2bn in 2021. About half the portfolio is made up of crop and professional lines insurance, with casualty and auto its next largest segments.

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The executive emphasized that the firming pricing environment had created opportunities in some business classes, “but not all”, and that some carriers now feel pressure to grow to make up for troubled loss years in their back book.

“There are a lot of people who have stumbled [who are now] coming out of the soft market filling up [on premium], saying ‘well how bad is it? How big a hole did I dig coming into this?’”

“We've never done that,” Gallagher observed.

“We're growing and have grown tremendously in [D&O] because other people burned a hole in their pocket, and they left an open field for us.”

According to Gallagher, Hudson has managed the cycle by shrinking at various points its medical malpractice book to as little as $35mn from a $160mn peak, and more recently, in a very short time span, taking its D&O portfolio from $30mn in premiums to $330mn.

Hudson focuses on specialized industry classes for financial lines, with the executive citing high tech and biotech IPOs as falling within the company’s sweet spot.

“If you just stick to your knitting and you're willing to wear an increased expense ratio from an underwriting perspective,” Gallagher said, “you don’t have to put down your pen, but you're not going to chase the volume”.

While he said that the company was not looking to be a broad index of the D&O market, he flagged that line, along with certain areas of commercial auto, as key areas for growth, in addition to its portfolio mainstay, crop.

We're growing and have grown tremendously in [D&O] because other people burned a hole in their pocket, and they left an open field for us

Gallagher also said Hudson had seen attractive opportunities to underwrite SPAC transactions that the broader market had backed away from, pointing to some companies that had a management team and business plan as “something we can underwrite”.

“But the large majority of it is stuff that we wouldn't touch with a bargepole.”

Gallagher said Hudson was focused on more complex risks, and “not afraid to write the scary stuff”.

“There's some people who say you can't write any of that. And then somebody will say ‘hey let's write all of it’. We're always going to be about selecting risk,” he explained. “We’re the wrong people to send a minimum premium policy that you are going to get 10 quotes on.”

Fronting carriers enabling MGA market ‘froth’

Hudson made a big bet on building out its portfolio through the MGA program distribution channel in 2002 after a slew of carriers withdrew capacity from the market.

Gallagher noted that the resurgence of the fronting market in the last three years had been driven by reinsurers looking for other avenues to grow to make up for cedants who have pulled back their reinsurance purchases.

Hudson’s actuarial and claims teams work with the company’s program administrators daily, as Gallagher explained it was key the trading partners worked with a “hand in glove relationship”.

My prediction is that there's going to be a lot more people running into trees over the next five years. All of that start-up froth inevitably can't all be top quartile
On the proliferation of fronting carriers in recent years

“If you don't have that level of connection, cooperation and common purpose, it's never a good idea,” he explained.

Discussing the growth of the fronting market more broadly, he added: “It's like a fast car. You could drive really fast and get somewhere quickly, or you could run into a tree.”

“My prediction is that there's going to be a lot more people running into trees over the next five years,” he added. “All of that start-up froth inevitably can't all be top quartile.”

For those new entrants that recently began focusing on the commercial auto market, he predicted it “would not end well”, saying that pricing had not reached a level where a run of the mill underwriter could make a profit.

Gallagher said while there had been improvements in pricing in commercial auto, he called the level of loss inflation in that segment “daunting”.

“This is an underwriting market,” he said, contrasting the current environment with the periods following major loss events – such as the liability crisis in the ‘80s or 9/11 – when “a rising tide lifted all boats”.

“You can make money by underwriting, but there's still a huge amount of risk if you pick the wrong risk.”

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