AM Best has warned in a new report that a growing cyber book could present a “material risk to a re/insurer’s financial strength” if it is not carefully managed and appropriately monitored.
According to the rating agency, cyber is a line with high levels of product risk requiring expertise and knowledge, though it can still be a source of “profitable growth and innovation” for carriers.
AM Best continued, “Cyber insurance has experienced a hardening rate environment since the rise in loss activity during the pandemic. While rate increases have started to show signs of moderation or even decline more recently, pricing remains attractive.
“However, there is a mixed picture in the market in terms of underwriting appetite for cyber. While some carriers remain very cautious about their cyber exposure and show no appetite to expand this part of their portfolio actively—or are even trying to reduce it—others see it as an attractive opportunity.”
Reflecting primary market counterparts, AM Best stated that reinsurers’ appetite for cyber exposures also varies.
“Some carriers have shown an appetite to include cyber within their suite of products, while others remain more cautious,” the rating agency said.
The firm went on, “Because of the nature of the risk, reinsurers typically approach cyber on a quota share basis with a loss ratio cap, rather than on an excess of loss basis.
“Coverage is typically written back-to-back, with a special attention devoted to exclusions. As such, there has been an increase in the use of exclusions across the industry in recent years, showing carriers’ concern for controlling their exposure in order to match their risk appetite.”
AM Best noted that it includes a carrier’s assessment of cyber loss potential in its rating considerations and also considers how this cyber loss potential plays a role in the carrier’s capital management and capital allocation decisions.
The rating agency concluded, “While the loss potential for cyber catastrophe scenarios currently remains generally below other catastrophe exposures across the industry, AM Best notes an increased awareness around potential cyber losses and a greater integration of this element in carriers’ capital management decisions.
“Consequences tied to reinsurance and retro considerations are also assessed as well as a carrier’s ability to put in place sufficient risk transfer tools to protect its balance sheet.”
