The next three years will be critical to the long-term growth prospects of the cyber insurance market, according to a scenario-led analysis of the market’s dynamics by Conning.
“A geological fault runs through the risk landscape,” analysts explain. “On one side are risks that the private sector is willing to assume; on the other are risks that only governments can take on.
“The cyber insurance market today is located on the edge of insurability. The scale and imminence of catastrophe losses in the next few years will likely determine on which side of that fault line cyber risk ultimately falls.”
For its first scenario, in the absence of exceptional catastrophe losses in the near-term, Conning projects the cyber market will continue to grow at double digit rates.
This growth would be driven by strong new business inflows, both in the US and internationally. With rapid growth will come a far greater ability to absorb future catastrophe losses.
Since 2020, the cyber insurance market has been growing at a remarkable fast rate, more than 50% annually in the US.
The main reason for this, Conning explains, has been rate increases that the market judged necessary to address the spike in ransomware claims that began in 2019.
Exposures have not risen at nearly the same rate; in fact, in 2021, many insurers were writing higher premiums on a narrower exposure base.
In its report, Conning also planted another scenario, where a still immature cyber market is rocked by one or more near-term catastrophe events on a scale not previously seen.
This would dent the confidence that has been created in available cyber risk models and deter investors from committing capital to the nascent cyber catastrophe bond market, analysts stated.
According to the report, these two factors would have three likely consequences. The first one, in the absence of a large and liquid market for tail risk, the overall market will lack the capacity needed to meet demand at affordable prices.
In the second one, prices could once again rise steeply, but now to a point where self-insurance looks more attractive than insurance to buyers. And in the third one, pressure would grow for taxpayer financed risk transfer options.
Conning’s study also explored a range of variables that feed into the above scenarios, including: drivers of demand for coverage, in the US and internationally and among companies of different sizes; and the diverse perils commonly classed as cyber risk and the benefits of bundling or unbundling them.
As well as the reliability of current cyber catastrophe models relative to the natural catastrophe models that have supported the steady growth of the insurance linked securities (ILS) market for natural catastrophe risks.
The last variable would be the advantages and disadvantages of “policy tooling” to manage exposures – notably the insertion of policy exclusions for systemic risks such as war (broadly defined) and critical infrastructure failure.
“Cyber has grown faster than any other line of business in recent years,” William Pitt, a director at Conning and author of the cyber insurance study, noted. “But it is still a small and immature market.
“The growth opportunity remains unrivalled, but investor confidence and carriers’ risk appetites are both fragile. Given this, the scale and imminence of catastrophe losses could permanently affect the market’s growth trajectory.”
