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Tailored Cyber Liability Coverage Forms Are More Efficient and Effective

Cyber Insurance-SF-2
June 30, 2017

A.M. Best recently reported that top cyber insurers have shifted away from writing packaged policies to writing standalone coverage. The split of $1.3 billion of 2016 direct premiums written stands at around 70:30.

A.M. Best states that this shift mainly results from many insurance companies realizing that tailored coverage forms are addressing cyber liability risks separate from traditional insurance products, such as commercial general liability, business interruption, or directors and officers policies, were more efficient and effective. Additionally, due to the general language of packaged polices, insurance companies have faced expensive litigation in cases where such policies did not include exclusory language.

A.M. Best’s findings are based on the Cybersecurity and Identity Theft Insurance Coverage Supplement, which was initially introduced by the National Association of Insurance Commissioners for year-end 2015. The information is limited to those companies required to file the supplement and does not include data for foreign insurance companies.

Overall, cyber insurance for the majority of this universe of companies was profitable, and the direct loss ratio decreased by 4.5 percentage points to 46.9 percent in 2016 from 51.4 percent in 2015. The decline in direct loss ratio for 2016 is partially attributed to the majority of reported cyber attacks being related to ransomware heists. In almost all ransomware cases, the losses were well below the deductible and a simple backup recovery resolved and remedied any negative long-term effect of the attacks.

Focusing on the top 20 cyber insurance writers, which represent an 87 percent market share in 2016, standalone cyber policy paid losses relative to direct premiums earned (DPE) increased to 24.3 percent from 19.5 percent in 2015. Paid losses relative to DPE for packaged coverages increased to 21.8 percent in 2016 from 15.7 percent in 2015. This increase in paid losses for packaged coverages was driven by defense and litigation costs.

The report notes that the cyber line of business has been predicted to become one of the leading growth areas within the US property/casualty industry, and coverages have been estimated to increase up to $20 billion by 2020. Direct premiums written rose 34.7 percent year-over-year in 2016, but A.M. Best thinks it is too early to determine if the growth projections will come to fruition. While many signs point to very substantial growth in the cyber line of business, it remains to be seen whether increased demand will be sustained beyond the typical bump that occurs after every noteworthy breach.

That said, A.M. Best believes a transition to standalone cyber policies may contribute to better pricing and reserving methods, which ultimately may lead to refinements in modeling tools and contribute to the more accurate understanding of risk aggregation.

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