Report Suggests Reinsurers Are Key to Future Cyber-Insurance Market

While the cyber-insurance market has been challenged by the increase in cyber-attack losses, the reinsurance market could hold the key to a viable cyber-insurance market in the future, according to S&P Global Ratings.

The changes the COVID-19 pandemic have brought to the way we work, shop, learn, and live have also changed the cyber-risk landscape. Those changes are likely to remain in place, according to S&P, bringing with them a likelihood of a continued increase in cyber attacks going forward.

In a recent report, Cyber Risks in a New Era: Reinsurers Could Unlock the Cyber Insurance Market, S&P says that prices in the cyber re/insurance market could rise sharply over the next few years. In some cases, those prices could double over current levels as insurers and reinsurers respond to the pandemic's acceleration of digital transformation and the accompanying systemic vulnerabilities, "causing economic and insured losses from cyber to skyrocket," S&P says.

S&P notes that as cyber attacks have increased and the awareness of cyber risks has grown, the demand for cyber insurance and reinsurance has increased significantly.

"The pandemic exacerbated the huge cyber-reinsurance protection gap by causing existing and new clients to request larger limits and more inclusions in their policies' terms and conditions (T&C)," the S&P report says. "In addition, some insurers are offering more-advanced services, including value-added assistance services, and we have seen a shift from nonaffirmative to affirmative (explicit) cyber coverage, leading to previously unrecognized premium volume."

As digitalization has boomed, the re/insurance industry has seen a substantial increase in cyber losses, the rating agency says, with "far higher" combined ratios in 2020 and 2021 than in prior years.

S&P cites Aon's analysis, which found that the cyber combined ratio in the United States increased by more than 20 percentage points to 95.4 percent in 2020 from 74.5 percent in 2019. "This was mainly attributed to the growing frequency and severity of ransomware and social engineering claims," S&P says. "These include claims for business interruption, rising incident response costs, and extortion demands. As a result, market rates for cyber protection in the United States have shot up since 2019, based on the increase in reference premium."

Even with the increase in premium, however, cyber-business lines were not as profitable for the re/insurance players in 2020 as they had been previously, according to S&P.

The rating agency suggests that to sustain long-term profitability, insurers will likely continue restructuring their cyber-insurance offerings, increasing rates further and adjusting terms and conditions, particularly the exclusions. "Some insurers also intend to further reduce their pay out limits, especially where contracts include ransomware or business interruption components," the S&P report says. "At the same time, they hope to increase retention levels through 2021–2023."

Depending on region and terms and conditions, some policyholders could see rate increases as high as 100 percent due to fundamental changes in risk levels, S&P says.

For cyber insurers, reinsurers' role is significant. S&P estimates that primary insurers cede 35 percent to 45 percent of global cyber premium to reinsurers. Those primary insurers also rely on reinsurers' expertise to help them manage potential accumulation risk and cyber-risk exposures, the rating agency says.

Partnerships between reinsurers and primary insurers could strengthen cyber-insurance coverage and provide better balance sheet protection against frequent and high-severity losses, S&P says. Such a partnership could also support expanded access to cyber-related services.

"A more mature retrocession and insurance-linked securitization (ILS) market could increase capacity and support cyber market growth and could lead to better returns on capital because of efficient capital management further down the re/insurance chain," the S&P report says.

The cyber-insurance market currently faces increasing demand but limited supply, S&P says, and lack of capacity could be holding back the development of a sustainable cyber re/insurance market. "The market would benefit from the development of a comprehensive retrocession market and the use of ILS or alternative capital to improve capacity," S&P says.

In addition, reinsurers' underwriting and modeling expertise could help to build the cyber-insurance market, according to S&P.

"In our view, if cyber insurance is to meet the needs of customers in the future, it is more important than ever that the industry focus on risk differentiation, strong underwriting, and assistance services," the report says. "Such services could help to reward customers whose cyber management is stronger."

S&P notes the growth in demand for cyber-insurance coverage, adding that it expects the business line to be one of the fastest-growing insurance markets over the next decade.

"The dynamic change in claims pattern, rise of cyber threats, and huge accumulation risk create an opportunity for larger reinsurance capacity," the S&P report says. "The number of reinsurers and insurers offering cyber coverage is rising in response. But with such a new segment, we think it is important for reinsurers to offer primary insurers support in managing the underwriting and risk management processes for cyber, as they do for natural catastrophe exposures."

The S&P report notes that the cyber-reinsurance market is still young, compared with traditional reinsurance lines. As it grows, it must overcome the challenges of limited loss experience and data history.

The reinsurance industry has been improving its data set by collecting information on the coverage it provides the primary insurance market, however, helping it improve its value proposition, S&P says. "Therefore, we expect reinsurers to play a major role in cyber risk management and in providing adequately priced protection," says the September 29, 2021, S&P report, by Manuel Adam, Maren Josefs, Simon Ashworth, Johannes Bender, Taoufik Gharib.