Cyber Market Dramatically Increases
Cyber risk has become one of the top priorities for company boards, regulators and governments following the sharp rise in data breaches, according to Moody’s, the ratings agency.
“Given the rising frequency and severity of cyber attacks, boards have become particularly focused on making sure corporations have adequate systems and controls in place to safeguard their own data and that of their customers,” said the in-depth report on cyber insurance released in mid-November.
Cyber attacks have increased by 30 percent year-over-year between the start of 2013 and 2015 — a trend that has continued, with 577 breaches reported in the first six months of this year, the report found.
However, the scale of the problem is much worse, as many attacks go unpublicized.
Over the last 15 years, the cyber insurance market has grown from about 10 insurers to about 50 carriers providing stand-alone cyber insurance, generating $2.75 billion in gross written premiums (GWP) in the U.S. this year. — Moody’s
Worse still, the average cost of cyber crime in the U.S. climbed by 22 percent, to $15 million this year, according to a new report by independent research firm the Ponemon Institute.
It’s understandable then, according to Moody’s, that the lack of credible data on losses and the potential risk accumulations have made insurers cautious, resulting in some offering relatively small limits.
“Given the uncertainties of this evolving market, with limited historical loss data and large potential risk correlations, we view expansion into the cyber risk insurance market as similar to that of other high risk/return product segments, such as catastrophe risk, fidelity/crime and terrorism,” the report said.
“One of the most significant challenges to insurers in this market is a lack of actuarially analyzable data about cyber attacks. Over time, we expect this to shift as companies gain experience from continued cyber assaults as well as through increasing disclosure requirements for publicly traded corporations.”
Fast Growing Market
It’s no surprise given the high-profile attacks on Target, Sony, JP Morgan, U.S. Office of Personnel Management and others that cyber insurance is one of the fastest growing markets for property and casualty insurers.
Over the last 15 years, the market has grown from about 10 insurers to about 50 carriers providing stand-alone cyber insurance, generating $2.75 billion in gross written premiums (GWP) in the U.S. this year, said Moody’s, which noted GWP was about $2 billion a year earlier.
Other carriers provide cyber-related endorsements to commercial general liability or multi-peril policies, according to the ratings agency.
The report noted that PricewaterhouseCoopers has forecast the cyber insurance market to grow to as much as $7.5 billion by 2020.
However, despite the recent growth, the ratings agency said that some insurers have reduced capacity, and increased rates and deductibles in response to large claims, particularly in retail and health care.
The biggest demand for stand-alone cyber insurance, according to Marsh, is from the hospitality, gaming, education, and power and utilities sectors, with a 32 percent increase in the overall number of U.S. clients buying cover in the first half of 2015.
Robert Parisi, managing director of Marsh FINRPO, said that estimates of the cyber insurance market continue to grow dramatically, with GWP up anywhere between 50 percent and 100 percent between 2014 and 2015.
“We’re seeing several industry classes start to buy a lot more of it,” he said. “One of those is general manufacturing or industrial clients who are incredibly, if not wholly, dependent on technology throughout the lifecycle of their process from supply chain to distribution and sales.
“As a result, we have seen a real growth in the property-related cyber risks.”
Moody’s reported that new carriers have entered the cyber insurance market, adding to the competition.
Kevin Kalinich, global practice leader for cyber risk at Aon Risk Solutions, said increased competition has surfaced among insurers targeting middle market companies for comprehensive coverage and aggressive pricing strategies.
However for large companies in retail, health care, finance and hospitality, it’s become increasingly difficult to get cover because insurers find it hard to price those risks, he said.
“In the future, companies are going to have to make a choice between maximizing coverage and capacity, in which case they are going to have to pay a higher premium, or pay the least amount they can, which is going to limit their capacity on a program or else pay an inverted pricing,” he said.
“Cyber insurance is also going to become much more of a macro-level issue for insurance. It’s going to affect property, general liability and crime insurance.”
He said that companies can improve their risk management by using a third party provider, while also benefiting from insurers offering more value-added services.
Peter Foster, executive vice president, FINEX North America, Willis, said that underwriters have become discerning about the policies they write for large retailers and health care companies, and are reviewing premiums across all industries as a result of the substantial losses incurred due to recent breaches.
“The insurance industry is responding to the threat of cyber attacks,” he said. “It’s still a robust marketplace even though these losses are occurring.”
Moody’s noted that insurers themselves are also at risk and if attacked, could face a severe and prolonged disruption to their business, resulting in a negative impact to their ratings or outlook.