Market capacity

Market capacity refers to the maximum volume of risk that insurers and reinsurers as a whole are willing and able to bear at a given moment, on a peril or line of business. It depends on the capital available in the sector, the actors' risk appetite, the contribution of alternative capacity from financial markets via Insurance-Linked Securities, and the perceived profitability of the line. Capacity is not fixed, it contracts after major losses that destroy capital or cool appetite, and expands when results are good and fresh capital flows in, attracted by returns deemed attractive. This breathing of capacity is one of the main drivers of the underwriting cycle, scarcity feeding the hard market and abundance the soft market. For an emerging risk, available capacity is a decisive indicator of practical insurability, since a risk that is theoretically insurable but for which the market offers little capacity remains hard to cover at a reasonable price. Cyber long suffered from limited capacity relative to demand, owing to modeling uncertainty and the fear of accumulation, which contributed to the severity of its hard market.

When demand for cyber cover surged without capacity keeping pace, the imbalance drove premiums up and led insurers to cut the limits offered, lacking sufficient capacity to absorb the accumulation risk.

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