Cyber Market Rights Its Course on Profitability

Direct premiums written for the U.S. cyber insurance market rose 50% to $7.2 billion in 2022 as the “first hard market” set the industry back on a path to profitability, according to a new report from AM Best. The ratings agency reported this week that growth in the cyber market has outpaced the broader commercial lines sector significantly, tripling over the last three years. Rate increases, strict underwriting and improved claims experience have made the difference. The cyber line’s loss ratio dropped to 43% on standalone policies and 48% for package policies between 2021 and 2022, a difference of 23 and 18 percentage points, respectively. According to AM Best, the combined ratio for 2022 is estimated at 71.9%.

“Underwriters have used every item in the proverbial toolbox to manage exposures. In addition to the rate increases, underwriters have cut limits, increased insureds’ own retention and improved risk selection,” said Christopher Graham, senior industry analyst, industry research and analytics for AM Best, in a statement. “With the cyber universe expanding and becoming more complex with artificial intelligence creating new exposures and ransomware attacks returning to prominence in 2023, the demand for cyber coverage will only increase.” While rate increases have fallen from their peak of an average of 34.3% in the fourth quarter of 2021 to about 8% in the first quarter of 2023, “to say the market is softening is relative,” according to AM Best.

“An 8% pricing increase on renewals is still a notable increase,” the firm said, adding, “Overall economic inflation is still hovering around 5%, and most cyber policies have self-insured retentions, making the effects of inflation even heavier on the insurance exposure. This means that the price increases are doing little more than covering for the cost of economic inflation.” Other notable changes occurred during the market correction, AM Best noted. Standalone cyber premiums now account for more than 70% of the market as buyers shift away from package policies. In fact, total standalone premiums exceed the entirety of 2021 cyber DPW from either source, even though package policies still outnumber standalone.

AM Best called the trend toward standalone cover “welcome news,” adding, “… the ongoing shift to standalone could minimize disputes and litigation costs because affirmative coverage and clear exclusions lead to less ambiguity about what situations cyber insurance covers.” AM Best also tracked a strong showing from the surplus lines market, which now writes nearly 60% of all cyber market premiums. Surplus lines writers steadily held about 25% of the market between 2015 and 2020, as tracked by the National Association of Insurance Commissioners (NAIC). As market dynamics shifted, surplus lines insurers took off, increasing their share by more than 500%.

“The nimbleness of surplus lines writers—their ability to craft policies tailored to the insured’s needs, while also taking advantage of the hard market—has provided significant benefits over the past two years,” said AM Best in its report, adding, “Surplus lines policy premium is on average multiple times that of admitted insurers on both packaged and standalone policies.” Surplus lines writers also achieved a better loss ratio at just over 17% for standalone policies compared to admitted carriers’ 29.5%, the ratings firm pointed out. AM Best found little change in insurer rankings—Chubb, Fairfax Financial, AXA XL and Tokio Marine remained the top writers by premium between 2021 and 2022. Arch Insurance Group jumped from the ninth spot to fifth in terms of market share and more than doubled its direct premiums written.

According to the report, the top 20 carriers write about 78% of the market. However, with signs pointing to 2022 as a solid financial year for cyber insurance, AM Best predicted that “ongoing profits may attract more capacity to the segment.” The rosier outlook is not to suggest cyber has eliminated all its challenges. AM Best reported nearly 27,000 claims in 2022, even as ransomware claims declined. Three-quarters of the reported claims were first-party losses, driven by a rise in business email compromise. “The balance between first-party and third-party claims has been consistent the past three years, so any shift in either direction will add to difficulties in projecting ultimate losses, impacting both reserving of ultimate losses and pricing of policies,” AM Best said.

Additionally, cyber insurers will face emerging threats from new technology. “Artificial intelligence and deep fakes are the next wave behind phishing scams, creating new opportunities for criminals,” said AM Best. “Voices and writing styles are being mimicked to look as if calls and messages are coming from a familiar source. AI is also now mimicking fingerprints and even moving into mimicking DNA. This threat will further pressure security systems and require that insurers be more vigilant about underwriting and pricing.”

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