Why is the specialty market expected to grow nearly $50 billion?

Specialty insurance is expected to boom over the next couple of years, likely driven by three key factors.

By 2027, the specialty insurance market will be valued at $130.1 billion, up from $81.5 billion in 2022, Deloitte forecast in its Global Insurance Outlook.

This is mostly predicated on three main factors:

1. The precision of risk assessment at a more micro level.
2. Insurtech innovation
3. Rising frequency of catastrophes

“I think over time, and particularly with insurers, they’re just and more precise at identifying things that are high, medium and low risk, versus what was happening 20 years ago,” said Eric Joost, COO at CAC Speciality, who joined Insurance Business to share his insight on specialty growth.

“In years past, we had more ‘naive capacity’ that might come into some of these markets, where these players were anchoring the prices or keeping prices lower, which is a good thing for clients, but over time that does create some challenges in the stability of the marketplace number and also for reinsurance availability.”

This has been bolstered by technological developments buoyed by insurtechs, especially within the cyber market.

“Cyber risk is certainly becoming a marketplace that’s going to contribute to the size of the specialty market in a material way. And then there’s other products in the contingent risk and tax environment, as well as reps and warranties — we call it transaction liability — where the specialty sector is innovating very uniquely and growing businesses very quickly,” he said.

Lastly, as natural disasters become more destructive and widespread, primary insurers may have a more difficult time trying to balance premium and returns.

“From a natural disaster point of view, you can look at parts of that market where as much as prices have risen, at least at a meta level, you’re not seeing enough capital created to necessitate a return,” Joost said.

“That’s going to put more pressure on primary insurers, which in turns, puts pressure on price. At the end of the day, it’s just the math that is coming through the balance sheets of the insurers and they’re going to react accordingly.”

Pricing adjustments and underwriting scrutiny to continue for the foreseeable future

Aside from predictions on the expected rise of the specialty market, Joost also shared his outlook as to how the broader insurance market will perform in 2024, and how a slower reaction to external concerns could impact underwriting scrutiny and price adjustments.

“Whether you’re wanting your business to be informed by how the world is changing around you or learn from underwriting and pricing mistakes, it can take some time to process through those changes and plan accordingly,” Jost said.

“Especially when you have an environment that we experienced within the last couple of years, the adjustment period to work through these hardships or a hardened market is going to go beyond when the market is spiking upwards,” he said. “It’s just sort of human nature that you’ve got to catch up for what you know you need to do but maybe we’re unable to achieve in the past.”

The cyber insurance market will be one to watch, especially given its relation to geopolitical pressures that are augmenting and intensifying the scope of associated risks.

“There’s an interesting overlap between what cyber risk is like and how it relates to cyber insurance and then how the wider world causes this risk to spike or occur,” he said. “As far as I remember, we’ve done a good job of being transparent about the threat of state actors with insurers and clients, but the marketplace still has to work through that.

“In part, it creates the perception, if not the reality, of more risk.”

The COO noted that it may be harder for an insurer and broker to try and manage these newfound risks, but they should focus on how they can help a client moderate them.