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Digital EditionCyber Insurance Market Poised for Exponential Growth
The U.S. cyber insurance market is set to experience exponential growth over the next decade, especially as aggregate cyber losses are expected to become a peak peril that rivals the most severe natural catastrophe losses in size, predicts CyberCube in a new report.
However, the report cautions that cyber risk remains a capital-intensive peril that will require structural innovation in the insurance industry to meet rising demand for higher coverage limits and to foster greater resilience against cyber threats.
“The cyber insurance market is set for outsized growth compared with other lines of P&C insurance over the coming 10 years,” stated Alex Tenenbaum, director of services for CyberCube and lead author of the report.
“Structural changes are required to support sustainable growth. Some of these changes are starting to emerge and will require fuel to accelerate their growth — for example, penetration into the small business space and the emergence of the cyber Insurance-Linked Securities market. Some are still very much in their infancy and will require broader market collaboration to unlock, such as public-private partnerships that work for both sides.”
U.S. standalone cyber premiums in 2023 totaled $8 billion, according to CyberCube’s data. Assuming all risk carriers manage capital against their exposures to a 1-in-250 year aggregate loss event, CyberCube reports that its catastrophe model estimates the industry required $20 billion of capital in 2023. “In other words, (re)insurers need $20 billion to meet obligations for a 1-250 year (0.4% probability) cyber aggregation loss,” the report explained.
CyberCube has modeled three growth scenarios for the U.S. standalone cyber insurance market over the next decade:
- A 10% compound annual growth rate (CAGR) would result in $17 billion of premiums by 2034.
- A 20% CAGR would lead to $45 billion of premium.
- A 30% CAGR could reach $109 billion in U.S. cyber premium.
By 2034, cyber risk is expected to become a peak peril for property and casualty insurers, according to CyberCube, which said it’s projection assumes that exposure will grow proportionally to premiums.
Based on projected 20% premium growth over the next decade, the U.S. cyber market will require a 500% increase in capital to $121 billion to manage exposures to a 1-in-250 year loss event, the report projected. That level of potential losses would exceed those from 1992’s Hurricane Katrina, the largest natural catastrophe to date with $102 billion in insured losses in 2023 dollars, CyberCube said.
Challenges and Opportunities
Third-party commentators have broadly reached consensus on a CAGR of approximately 25% for the global cyber insurance market during the next two to 15 years, CyberCube noted. However, achieving higher levels of growth will require product innovation to increase cyber coverage penetration across organizations, rather than relying mainly on rate increases as seen in recent years, according to to the report.
Low penetration rates and insufficient coverage limits present both challenges and opportunities for insurers and brokers. According to CyberCube’s U.S. Industry Exposure Database, almost three-quarters (72%) of large companies purchase some level of standalone cyber insurance in the U.S. today. However, this drops to just 43% for medium-sized companies, 12% for small businesses, and a mere 3% for micro organizations.
Despite these challenges, there are significant opportunities for insurers to expand the cyber insurance market. Developing new markets, such as consumer and microbusiness cyber insurance, can help build premium and resilience. Diversifying exposures geographically and by industry is another key strategy. For example, the growth of internet technology coverages and expansion into underserved markets can help insurers spread risk and tap into new sources of premium.
Emerging Solutions
The cyber insurance-linked securities (ILS) market is gaining traction, with pioneering catastrophe bond issuances in 2023 from major insurers like Axis Capital, Beazley, Chubb, and Swiss Re, according to the report. These 144A cyber catastrophe bonds, along with the first private cyber catastrophe bonds earlier in the year, mark a significant evolution in the cyber (re)insurance arena as the industry looks to harness capital markets for managing systemic cyber risk.
However, the cyber ILS market size will need to grow significantly to match the current property ILS market and meet the projected capital requirements for cyber risk by 2034, CyberCube noted. In 2023, for example, there was an estimated $37 billion of outstanding 144A bonds covering U.S. property peak exposures. Even if the cyber ILS market matches this size by 2034, (re)insurance capital will still need to grow more than three-fold over the next decade to meet $121 billion in capital based on a 20% CAGR.
As cyber risk continues to grow, public-private partnerships, such as those used for terrorism, flood, and hurricane risks, may become necessary to provide adequate capacity for the worst tail events. In 2023, the White House launched the National Cybersecurity Strategy as a coordinated effort to strengthen the resilience of the U.S. economy to catastrophic cyber risk.
CyberCube expects that insurance sector innovations and public-private partnership initiatives will need to develop in tandem as the cyber risk grows, as the private sector alone may not be willing to assume all losses arising from the most extreme events in the mid-to-high range of cyber insurance growth projections.
View the full CyberCube report here. &
