A new AM Best report has argued that prospects for the US cyber insurance market are “grim,” due to the significantly worsening risk hazard environment and issues such as ransomware, business interruption and aggregation.
Analysts noted that cyber insurance, which began as a diversifying secondary line, is now a primary component of a corporation’s risk management and insurance purchasing decisions.
Consequently, AM Best says that insurers urgently need to reassess all aspects of their cyber risk, including their appetite, risk controls, modeling, stress testing and pricing, to remain a viable long-term partner dealing with cyber risk.
Challenges the cyber insurance market are facing include rapid growth in exposure without adequate underwriting controls, the growing sophistication of cyber criminals that have exploited malware and cyber vulnerabilities, and the far-reaching implications of the cascading effects of cyber risks and the lack of geographic or commercial boundaries.
The AM Best report observed that standalone cyber insurance policies, up 28% in 2020, have seen a higher rate of growth compared with packaged policies, while frequency on standalone policies also has increased faster also the last three years than for packaged policies.
Total claims rose 18% in 2020 owing strictly to first-party ransomware claims, which were up 35% in 2020 and now account for 75% of cyber claims.
Meanwhile, the loss ratio for cyber insurance rose dramatically in 2020, to 67.8%, from 44.8% in 2019. However, the increase was not limited to just a few insurers—the loss ratio rose for 15 of the 20 largest cyber insurers.
“The rate increases for cyber insurance outpaced that of the broader property/casualty industry, but the increase in cyber losses outstripped the rate hikes, which suggests more trouble for 2021 as ransom demands continue to grow,” said Sridhar Manyem, Director, Industry Research and Analytics at AM Best.
And although AM Best views the industry as being well-capitalized, Associate Director Fred Eslami warned that: “An insurer whose risk management approach is deficient can find itself subject to accumulation risk beyond its tolerance and could face ratings pressure,” said Fred Eslami, associate director, AM Best.