Will cyber insurance rates double in the next couple years?

Prices in the cyber re/insurance market could rise sharply between 2021 and 2023, in some cases doubling from current levels, according to a report from S&P Global Ratings.

“Depending on the region and [terms and conditions], policyholders could expect rate adjustments of up to 100% because the risk level has fundamentally changed,” S&P Global Ratings said last week in its report, Cyber Risks In a New Era: Reinsurers Could Unlock the Cyber Insurance Market.

The global COVID-19 pandemic has accelerated digital transformation and increased systemic vulnerabilities, causing economic and insured losses from cyber to skyrocket, S&P said. As a result, the demand for cyber re/insurance coverage has increased significantly, mainly because of a heightened and rising awareness of cyber risks.

“The pandemic exacerbated the huge cyber insurance protection gap by causing existing and new clients to request larger limits and more inclusions in their policies’ terms and conditions,” the report said. “In addition, some insurers are offering more advanced services, including value-added assistance services, and we have seen a shift from non-affirmative [“silent” cyber] to affirmative (explicit) cyber coverage, leading to previously unrecognized premium volume.”

Given the boom in digitalization, the re/insurance industry has seen a substantial pick-up in cyber losses, with far higher combined ratios in 2020 and 2021 than in previous years, S&P reported. For example, the cyber combined ratio in the United States increased by more than 20 percentage points to 95.4% in 2020, from 74.5% in 2019 (mainly attributed to the growing frequency and severity of ransomware and social engineering claims). Here in Canada, the loss ratio for cyber liability was more than 100% so far in 2021, the Office of the Superintendent of Financial Institutions reported recently.

To sustain long-term profitability, S&P said it anticipates insurers will continue to restructure their cyber insurance offerings — increasing rates further and adjusting their terms and conditions, particularly exclusions. “Some insurers also intend to further reduce their pay out limits, especially where contracts include ransomware or business interruption components, the report said. “At the same time, they hope to increase retention levels through 2021-2023.”

S&P also said the market would benefit from a more mature retrocession market and the use of insurance linked securities or alternative capital to improve capacity. “The market faces increasing demand, but limited supply. In our opinion, lack of capacity could be holding back the development of a sustainable cyber re/insurance market.”

Primary insurers rely heavily on the reinsurance market for cyber insurance because it has a relatively short track record compared with more traditional and mature property and casualty lines of business. “We estimate that they pass 35-45% of global cyber premium to reinsurers, with some regional variation,” S&P said.

Most of the capacity for cyber reinsurance has been provided by large carriers, and S&P expects this concentration to reduce in the next few years as more reinsurers enter the cyber reinsurance market, cautiously increase insurance limits, or expand their cyber product range.

Partnerships between reinsurers and primary insurers could also strengthen coverage and give greater balance sheet protection against frequent and high-severity losses, as well as support access to cyber-related services, S&P wrote in the report.

Feature image by iStock.com/ipopba