Best’s Commentary: Hot Cyber Market Is Cooling; Solutions to Address Systemic Risks Needed

OLDWICK, N.J.--(BUSINESS WIRE)--The slower pace of rate increases and cutbacks in capacity highlight how the cyber liability insurance market may be starting to cool, even as another high-water mark for premiums is likely in 2022, according to a new AM Best commentary.

The Best’s Commentary, “Hot Cyber Market Is Cooling; Solutions to Address Systemic Risks Needed,” states that strong demand for cyber insurance and the substantial rate increases in recent years have made the segment the fastest-growing one in the U.S. property/casualty insurance industry. AM Best estimates cyber direct premiums written in 2022 to range between $8 billion and $11 billion, up from $2.7 billion just two years ago. Additionally, average quarterly price increases, albeit still high, have slowed somewhat since peaking at 34% in fourth-quarter 2021, according to published reports, at the same that insurers have become more conservative with limits and shares. Insurers have placed greater focus on managing aggregate cyber exposures given the systemic risk involved.

“Cyber risks have no seasonal or geographic limitation,” said Christopher Graham, senior industry analyst, AM Best. “A cyber event could start in Europe, spread to North America and then across the Pacific Ocean into Asia. The spread of cyber events across borders prevents insurers from diversifying cyber risks.”

As the market evolves, new capacity solutions have emerged. Quota share reinsurance has become popular among insurers who are uncomfortable with cyber risks and need reinsurance expertise and capital for underwriting. The insurance-linked securities (ILS) market also has made some inroads into the cyber market, providing extra capacity.

However, as the commentary notes, the cyber insurance market has yet to encounter a catastrophic loss, with the 2017 NotPetya attack coming the closest. Any cyber catastrophe could cause the markets to revisit these reinsurance and ILS solutions. Consequently, insurers and reinsurers are starting to incorporate catastrophe loads into pricing models. Like the property insurance market, cyber insurers are increasingly differentiating between attritional and catastrophe losses.

“A well-designed government backstop may allow insurers to offer more capacity and minimize the protection gap in cyber insurance,” said Sridhar Manyem, senior director, industry research and analytics, AM Best. “However, underwriters are best positioned to respond quickly to changing market conditions, while government regulators, challenged by bureaucratic and political considerations, might not be as nimble to react.”

To access the full copy of this commentary, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=329709.

A video discussion about this commentary with Manyem and Graham is available at http://www.ambest.com/v.asp?v=ambcyber323.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

Copyright © 2023 by AM Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.