Market to crack on with policy tweaks as private equity sits up and takes notice

Are outdated policy wordings costing your business millions?

There’s a delicate balance between portfolio protection and evolving industry demands.

That’s the view of Mahesh Mistry (pictured), senior director and head of analytics at AM Best, as he delved into stress testing, cyber, policy wording and the evolving influence of private equity in the insurance sector.

“If you take a step back and look at what the insurance market has faced since the financial crisis, it’s clear that the sector has shown resilience,” Mistry said in an interview with Bermuda:Re+ILS at the Bermuda Risk Summit last month. 

“Has everything been modelled perfectly? Probably not, but the resilience is there. 

“Bad habits always have a way of creeping back over time.”

“Smaller, more concentrated companies might face more significant impacts, but overall, the market has navigated these challenges reasonably well.”

This resilience, however, comes with the caveat that stress testing and scenario planning must evolve to keep pace with emerging risks. 

“Companies stress-tested pandemic scenarios five years ago, but the question is, did they account for the realities that unfolded during Covid,” he asked.   “The modelling was good, but it’s never perfect. You never know what’s going to happen tomorrow.”

Mistry also emphasised the critical role of policy wording in mitigating risks, particularly during unforeseen crises.

“What we’ve seen with events like Covid-19 and the Russia-Ukraine conflict is the importance of precise policy wording. 

“Cases have gone through courts in different jurisdictions, highlighting the need for clarity and effectiveness in policies,” he explained. 

However, he warned, “bad habits always have a way of creeping back over time.”

Cyber: the wild west of insurance

Cyber risk emerged as a focal point of the interview, with Mistry describing it as “a new class of business that’s challenging to model”. 

He elaborated: “Cyber risks don’t respect borders. You can’t diversify geographically like with traditional catastrophe risks. Instead, you need to examine the industries and company sizes you’re insuring.”

Despite its challenges, the cyber insurance market is expanding, as Mistry explained: “Exposures are increasing, but the potential economic loss far outweighs what the industry currently covers.

“Companies mitigate risks through policy wording and limits, but the gap is significant,” he said. “These differences in policy wording determine what is and isn’t included in coverage, and these distinctions have led to court disputes across jurisdictions.

“The need for clarity in this area cannot be overstated.”

Eyes on talent and regulation

Another challenge in the cyber insurance sector is talent acquisition. 

“Underwriting cyber risk isn’t your bog-standard property risk,” Mistry said. “It demands expertise in risk management and a deep understanding of counterparty behaviour; companies entering this space need the right talent to navigate these complexities effectively.” 

He noted that the growing complexity of cyber risks also presented opportunities for innovation and growth, saying: “The insurance industry is adapting, but the gap between economic losses and coverage remains sizeable. 

“As cyber exposures grow, companies need to focus on innovation and resilience,” he said.

Mistry then offered a balanced perspective on the influence of private equity: “There have been instances where private equity has successfully invested in insurers. 

“The success depends on the firm’s approach, track record and understanding of the insurance business. 

“Firms with experience and rigour tend to achieve better outcomes,” he observed.

However, the dynamics across the industry are changing. 

“It’s harder for private equity to achieve the returns they did ten or 20 years ago; their ability to exit within a set timeframe is more challenging today, especially in the life insurance sector, where liabilities require a longer-term approach,” Mistry said.

Regulation matters

Regulatory scrutiny plays a pivotal role in this context. 

“Regulators have strengthened their oversight based on past incidents,” he said. “Probing capital structures and investment mixes is essential to ensure stability and transparency in the market.”

The growing prominence of insurance-linked securities (ILS) and sidecars were also brought up, and Mistry stated: “ILS has become an integral part of the market. While there were doubts about its longevity a decade ago, it’s now a well-established component of the insurance ecosystem.” 

Mistry highlighted the importance of collaboration between traditional and non-traditional insurance providers.

“The integration of ILS into the market model demonstrates the ability of the industry to embrace innovative solutions that complement traditional offerings,” he said.

Mistry painted a picture of an industry that is both adaptive and resilient. 

“The insurance sector has demonstrated its ability to navigate crises, but the challenges ahead require even greater adaptability,” he said.  “From cyber risks to regulatory pressures, the landscape is complex, but there are significant opportunities for those prepared to innovate and evolve.” 

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