The hot cyber market is starting to cool due to a slower pace of rate increases and cutbacks in capacity. At the same time, as the market evolves, more solutions are needed to address the systemic risk it possesses, according to a recent report by AM Best.
The COVID-19 pandemic shifted much of the US workforce into a remote environment. The technology was there, but many businesses lacked safeguards to protect their systems.
This led to a growth in cyber crime, of which ransomware was the most prominent. The simultaneous rise of crypto currencies also made ransomware profitable for criminals, incurring expensive insurance claims.
To this, insurers responded with every tool they have, including raising rates, increasing policyholder retentions, and cutting limits.
Initially, cyber insurance was significantly underpriced. But in 2021, the average quarterly price increase was 26%, peaking at 34% in the fourth quarter. In 2022, price increases were still high but the pace of increases slowed.
The rating agency stated that strong demand for cyber insurance and the substantial rate increases in recent years made the segment the fastest-growing one in the US
property/casualty insurance industry.
AM Best estimated cyber direct premiums written in 2022 to range between $8 billion and $11 billion, up from $2.7 billion just two years ago.
Even though they are still high, average quarterly price increases have slowed somewhat since peaking at 34% in fourth-quarter 2021, the report highlighted.
This has happened even as cyber insurers remain conservative with limits and shares. Most insurers are reducing policy limits. They have also placed greater focus on managing aggregate cyber exposures given the systemic risk involved.
“Cyber risks have no seasonal or geographic limitation,” said Christopher Graham, senior industry analyst, AM Best. “A cyber event could start in Europe, spread to North America and then across the Pacific Ocean into Asia. The spread of cyber events across borders prevents insurers from diversifying cyber risks.”
As the market evolves, new capacity solutions have emerged. Quota share reinsurance has become popular among insurers who are uncomfortable with cyber risks and need reinsurance expertise and capital for underwriting.
Additionally, the insurance linked securities (ILS) market has cautiously entered the cyber market, providing extra capacity.
AM Best’s report noted that the cyber insurance market has yet to encounter a catastrophic loss. With around $5 billion in premium in 2021, a $1 billion loss event would strain the system. A larger loss would be difficult for insurers to cover.
Any cyber catastrophe could cause the markets to revisit these reinsurance and ILS solutions, the rating agency highlighted.
Consequently, insurers and reinsurers are starting to incorporate catastrophe loads into pricing models. Like the property insurance market, cyber insurers are increasingly differentiating between attritional and catastrophe losses.
Sridhar Manyem, senior director, industry research and analytics, AM Best, commented: “A well-designed government backstop may allow insurers to offer more capacity and minimise the protection gap in cyber insurance.
“However, underwriters are best positioned to respond quickly to changing market conditions, while government regulators, challenged by bureaucratic and political considerations, might not be as nimble to react.”
