AM Best, a credit rating agency, has assigned a stable outlook to the global cyber insurance sector, citing increased demand and promising growth prospects in the near term as uptake rates continue to rise steadily.
“The reduction in rates has been due to various factors, including increased competition from the supply side,” commented Christopher Graham, Senior Industry Analyst, AM Best.
“In addition, improving cyber security practices and decreases in claims frequency have also led to rate reductions after a period of accelerated rate increases driven by a surge in ransomware attacks in 2020 and 2021.”
AM Best has detailed the newly assigned outlook in one of its reports on the cyber market.
Their Market Segment Report titled “US Cyber: ‘Hot Pricing Cools Off and Rapid Growth Stalls’” discusses the industry’s performance, highlighting that direct premium written (DPW) growth remained flat in 2023 compared to the previous year. This follows a period of rapid expansion, during which premiums in the US cyber segment more than tripled from 2019 to 2022.
According to the report, claims severity has decreased, which more than offsets the increase in frequency. Results on a calendar year basis were stable as a result.
Fred Eslami, Associate Director, AM Best, added: “Good cyber practices and awareness of the importance of cyber hygiene have proven beneficial to both insureds and insurers.These practices have led to a steady decline in the segment’s loss ratio, despite a sharp increase in ransomware attacks in 2023, which resulted in a 50% increase in first-party claims.”
“We expect that cyber coverage will continue to grow over time, as the heightening awareness of cyber risks contributes to an increase in exposures and, correspondingly, an increase in demand for cyber insurance,” continued Eslami.
Cyber insurers still rely heavily on reinsurance, with over 50% of cyber premiums ceded to reinsurers. This dependence on reinsurance leaves cyber insurers somewhat at the mercy of their reinsurers.
With cyber insurers already focusing on aggregate exposures to systemic risk, any pullback by reinsurers to limit their own capacity on cyber coverage will certainly flow downstream to primary insurers and limit primary insurers’ appetite for cyber insurance.
AM Best’s stable outlook for the segment is supported by factors such as ongoing improvements in cyber hygiene, anticipated profitability in the intermediate term, and enhancements in underwriting practices and policy language.
The report highlights additional factors, including heightened competition and modest premium growth in the United States, potentially indicative of international trends.
It also underscores challenges posed by increasingly sophisticated cyber attacks leveraging artificial intelligence (AI), along with threats like ransomware and business email compromise, which could impact cyber insurance underwriting.
