Despite a slowdown on the previous two years, the cyber insurance market continued to expand in 2018, with premium volume exceeding $2 billion for the first time and which is supported by the sector’s heavy use of reinsurance, highlights A.M. Best.
As the world strives to become truly digital and advanced technology supports increasing interconnectivity, cyber risk has become more and more prominent. For insurers and reinsurers, it represents both a huge challenge and opportunity, commonly discussed as one of the most important emerging risks in the industry.
According to A.M. Best, cyber market growth is being driven by organisations seeking to reduce cyber and reputational risk and protect their balance sheets. At the same time, insurance firms have now removed cyber cover from traditional coverage, while stricter regulation in Europe and the U.S. is also spurring growth.
In 2018, for both standalone and packaged policies, direct premiums written increased by 12.6%, while the underwriting performance also remained strong, with direct paid loss and DDC ratios under 25 for both standalone and packaged policies.
“Writers of cyber insurance are still refining their pricing and underwriting. As this line of business stabilizes, more data is gathered, and legal environments become more defined, AM Best expects that the current profitability of cyber insurance will attract more competition, which will ultimately pressure profitability,” says the ratings agency.
As cyber policy became standardised, this enabled smaller insurers to participate, and A.M. Best notes that many of these carriers cede the entire risk to their reinsurance counterparts. The ratings agency expects the trend of smaller players driving cyber growth to continue.
Citing Aon figures, the ratings agency states that an estimated $800 million in cyber reinsurance was placed in 2018, which is approximately 40% of all direct premiums written being ceded to the reinsurance market.
“Additionally, treaty reinsurance for cyber is now much more widely available than the more expensive and less preferred facultative reinsurance. Most treaties are being written as quota share reinsurance treaties, although most of these agreements include a loss ratio cap,” says A.M. Best.
For reinsurers, the emergence of cyber risk has come at a time when an abundance of capacity continues to stress the property catastrophe market, ultimately providing diversification into a new and potentially profitable line of business.
“We believe the cyber insurance market presents a positive opportunity for insurers. As companies’ exposures to cyber risk continue to grow, so too will the demand for cyber insurance. Capacity should also continue grow, given that the line’s profitability will undoubtedly attract more new market entrants,” says A.M. Best.