Despite the fact that the cyber insurance and reinsurance market is forecast to grow rapidly, rating agency Fitch believes that the influence of cyber risks on the ratings it gives will be mostly gradual.
The reason is that, so far, cyber risks only make up a relatively small proportion of re/insurers portfolios and companies are being cautious in growing their cyber books, or in expanding coverage to far.
The reason for this cautious approach is that cyber risks remain difficult to analyse, model and price, meaning the cyber claims potential is difficult to establish and so nobody wants to be caught out.
Cyber risk underwriting is still profitable for the early market entrants, Fitch says, remaining an area of opportunity and growth for insurers and reinsurers. Growth is especially likely to be seen in financial services, where cyber risk exposure is particularly large and regulation should drive demand for coverage.
But cyber risk itself is rising exponentially, with the proliferation of internet connected devices, growing number and cost of data breaches, large quantities of personal or sensitive data held by companies, the increasing reliance on third-party vendor systems or cloud technologies, the digitalisation of our infrastructure such as electric grids, and the development of more automated systems and products such as in transportation.
Fitch expects that as the cyber risk insurance and reinsurance market grows, competition is set to rise especially due to new entrants targeting this line of business.
“Competition is likely to erode profit margins and there is a risk of new entrants with limited underwriting experience, underpricing cyber risk, or accumulating large concentrations of cyber exposure relative to the overall business and capital,” the rating agency explained.
Despite the fact entrants have been cautious to date, Fitch says that there is already the potential for cyber exposures to generate material losses for some re/insurers.
In particular, “The possibility of unpredictable extreme events and the risk from “silent” cyber exposure that insurers may not have recognized within traditional commercial insurance products,” are a threat to some companies.
For the moment though, Fitch Ratings expects “Cyber insurance business to be ratings neutral for most highly rated insurers with sound underwriting, particularly as it represents a relatively small part of overall risk exposure.”
But any signs of aggressive growth in cyber underwriting, or a high portfolio concentration, would be considered to be credit negative to re/insurers ratings.
Cyber risk insurance premiums are anticipated to grow to around $20 billion over the next decade, suggesting that much more cyber reinsurance capacity will be required to help underwriters control their exposures and manage their profitability.
