Gallagher Re’s report underscores the rising concern among business and insurance sector leaders regarding the potential for a large-scale systemic cyber attack, commonly known as a “cyber catastrophe” risk, due to the complex challenges and uncertainties it presents.
The report underscores that while the cyber insurance market is rapidly evolving, it has yet to confront the potential fallout of a cyber catastrophe of unprecedented scale.
Unlike markets for natural catastrophe risks, which frequently witness events like hurricanes, wildfires, tornadoes, and floods, the lack of historical data and inconsistency in coding frameworks make modeling and pricing cyber catastrophe events particularly challenging.
The result is a high level of uncertainty that affects the industry’s ability to assess and manage this risk effectively.
In the realm of cyber modeling, the report reveals significant divergence, which has raised concerns among capital providers about the reliability of current models.
As a response to these uncertainties, the (re)insurance sector is taking measures to manage its exposures through adjusting risk appetite, pricing strategies, and introducing tighter policy wordings and exclusions.
Despite these challenges, the demand for cyber insurance continues to grow steadily. Insurers have seen triple-digit rate increases over the past three years, which has boosted confidence in pricing this complex risk.
Nevertheless, while capital is flowing into the market, capital providers remain cautious about offering cost-effective and systemic solutions that address carriers’ concerns about the unknown nature of cyber catastrophes.
Corporations are also taking steps to mitigate their cyber risks. The cybersecurity industry has made significant advancements since the NotPetya attack in 2017, with developments such as artificial intelligence and new cybersecurity tools offering improved risk management.
However, there are concerns that these technologies could pose potential security challenges if misused, creating ongoing uncertainty in the market.
To address these challenges, model providers are investing in enhancing their capabilities. Still, the (re)insurance industry requires more comprehensive and accurate data from insured clients about their cyber vulnerabilities and loss experiences to refine their models and pricing strategies, the report noted.
This may lead to more specialised coverage, such as differentiation between large corporations vulnerable to targeted attacks and small and medium-sized enterprises (SMEs) looking to insure against longer-tail, system-wide events.
Ian Newman, Global Head of Cyber at Gallagher Re, emphasised the growing complexity of the cyber insurance market, stating, “There are many challenges around the cyber market today and this is only going to intensify as the class grows. Gallagher Re has long held the view that cyber is going to become the most capital- and expertise- constrained class within the insurance industry. We have invested in a team which is uniquely equipped to help our partners navigate these challenges, some of which are described in this paper.”
