From kidnapping to cybersecurity – there’s a policy for that

Ever thought of opening your own escape room or theme park?

Or maybe you’re thinking of contacting SpaceX to launch a satellite of your own?

It could be that you simply have a piece of art or expensive jewelry at home.

What if you’re trying to make it as an influencer where your online reputation is your most important asset?

To address all the above, and more, there is a niche segment within insurance called “specialty insurance.” As the name would suggest, specialty insurers attempt to cover risks that are too unusual, complex or volatile for standard insurers to price correctly. Examples of specialty insurance coverage include:

• cyber insurance,
• marine, aviation and energy risks,
• kidnap and ransom,
• directors’ and officers’ (D&O) risk, and
• niche businesses or properties.

Standard versus specialty insurance: What’s the difference?

The line between standard and specialty insurance is not always straightforward. A small office building in the suburbs is more standard while a chemical manufacturing facility of the same size would fall well under specialty. The more unusual the asset, the environment and potential loss, the more likely you are to use a specialty underwriter.

The most significant difference from standard insurers is that specialty insurers do not rely on scale and mass data the to underwrite risk, but instead use specialized knowledge and models to support their underwriter’s judgement. Often, specialist underwriters grow a very specific set of knowledge around their segment: engineering intricacies, political risk, weather models, etc. The policies themselves are much less standardized, with more levers around maximum paid, duration, repricing, conditions to be met or excluded events.

The benefits of investing in specialty insurers can be significant.

What makes specialty special?

The building of detailed knowledge in niche areas is its own self-reinforcing moat. An insurer that has been covering political risk for decades will have more claims data, stronger broker relationships and increasingly better understanding of the risks to avoid. Because these risks are harder to assess, pricing is generally less commoditized. As such, customer retention rates and margins tend to be higher.

Specialty insurers also have more flexibility to respond to changing environments. They can reduce the amount of coverage offered, increase deductibles, add exclusion clauses or just reduce their overall exposure.

A good example is the beginning of the conflict with Iran, when insurance contracts on ships were repriced every 72 hours for the first few weeks, with the ship/cargo coverage going from roughly 0.25% of the ship’s value to several percentage points more. In some cases, quotes were increasing by more than tenfold.

Lloyd’s of London, the world’s largest marketplace for specialty insurance, wrote over GBP57.9 billon of gross premiums in 2025 and reported a combined ratio of 87.6% (implying an operating margin of 12.4%). Combined with investment incomes, it generated a return on capital of 22%. This level of profitability also points to competition flowing in with new money, leading pricing to degrade by 3.7% as insurers compete for growth. Price weakness was especially elevated in corporate property and global reinsurance, with the latter seeing unprecedented influx of new alternative capital. Life and middle-market insurance are still seeing a hard market (a positive pricing environment).

This is typical of the ebb and flow of the insurance cycle. Strong profit attracts new capital, which creates more competition and pushes prices down. Returns eventually deteriorate or a major loss removes capital from the market, leading pricing to improve again. With a highly diversified specialty insurance market, different segments will be at different points in the cycle at different times. The best insurers are not those that grow the fastest; they are the ones that are willing to shrink their exposures to segments where pricing doesn’t adequately compensate for the risk taken, while identifying when to get back in for the right price. Seems a bit like equity investing.

What else differentiates specialty insurers? One thing is that in some segments, claims can take years to emerge, particularly in casualty, professional liability and D&O insurance. This can lead to current profits and underwriting quality looking good at the expense of future profitability. As such, firms need to strike a fine balance between maintaining enough insurance reserves for future claims, while also not over-penalizing short-term profit.

How do we have exposure?

One of the specialty insurers we own is Hiscox Ltd. (HSX LN), a Bermuda-based Lloyd’s insurer with a strong retail specialty presence. The company operates in three segments:

• Retail: specialty products to individuals and small businesses in the UK, Europe and the United States.
• London market: underwrites complex risk through the Lloyd’s market, with a strong focus on marine, energy, aviation, terrorism and political risk.
• Reinsurance: reinsurance for other insurers and insurance-linked capital supplied by outside investors.

In 2025, Hiscox wrote around $5.0 billion of contracts and has a reputation of excellent underwriting culture along with a best-in-class brand in the insurance world and among high-net-worth individuals.

Another name we own is US-based RLI Corp. (RLI US). It operates through a decentralized underwriting model and is a consistent top performer within the industry given its conservative underwriting and reserving. RLI focuses on the segments of niche properties, casualty and surety markets.

RLI has produced an underwriting profit for 30 consecutive years and increased its dividend for 50 consecutive years, an anomaly within the industry.

The specialty space is getting smaller

Within the sector, one of the big topics recently has been M&A. Twenty years ago, there were more than ten publicly listed Lloyd’s of London specialty insurers. Now only three remain, with the largest one – Beazley – in the process of being acquired by Zurich Insurance.

Given the attractive characteristics described above, it is easy to see why the large composite insurers would want to gain exposure to specialty insurers. Large composite insurers have significant capital to deploy and global distribution relationships, but lack the underwriting culture and specialist data required to enter these niche markets organically. Similarly for investors, specialty insurers can be compelling investments when they have the discipline to avoid bad risks and the expertise to price difficult risks better than competitors.