Direct premiums written in the U.S. cyber liability market increased by 75% in 2021, far outpacing the overall property/casualty insurance industry. However, according to an AM Best report, a 16% increase in claims and only a modest reduction in the loss ratio despite significant rate increases highlights the segment's ongoing challenges.
According to the new Best's Market Segment Report, "U.S. Cyber: The Hardest of the Property/Casualty Markets," some of the cyber growth is being driven by the overall hardening of commercial insurance prices as a result of inflation fears and a general weakening of the investment market. The pandemic also highlighted changes in work environments and a greater need for cyber security. The rise of crypto-currencies, which are difficult to track, the speed with which payments are made, and the scarcity of buyers for stolen data all make ransomware more appealing to criminals, increasing the need for coverage.
"Throughout 2021, cyber crime generated significant headlines," said Christopher Graham, senior industry analyst at AM Best. "These attacks highlight the importance of addressing cyber threats, which necessitate collaboration among brokers, underwriters, managing general agents, and customers, as well as some legislative and regulatory involvement." Because of the increasing frequency and severity of ransomware attacks, insurers must be more proactive."
In 2021, standalone cyber direct premium increased by 95 percent, surpassing all 2020 cyber premium combined (i.e., standalone and packaged). The majority of cyber-related claims were made on packaged policies in 2018. However, the report states that claims on standalone policies are now the majority—and growing. Because more sophisticated clients with more data and financial resources typically purchase stand-alone policies, they are more likely to be subject to claims.
Despite continued growth in cyber claims in 2021, cyber insurers' underwriting performance improved, as evidenced by an estimated combined ratio of 91.8, though the estimated combined ratio on standalone policies was worse at 98.8. According to the Council of Insurance Agents and Brokers, the positive underwriting results were largely due to strong rate increases that exceeded 25% on average in each quarter of 2021.
AM Best expects the cyber market to remain difficult for some time as cyber attacks become more complex. Captives have become an appealing risk management option for corporations due to a hardening market and a lack of capacity. As more data becomes available, cyber risk modeling improves as well; however, these models are nowhere near as mature as natural disaster models.
"Global regulators, including the NAIC, should consider requiring insurers to break out cyber metrics in their financial statements, which will greatly improve the accuracy and consistency of these metrics," said AM Best associate director Fred Eslami. “It will also enable stakeholders to analyze trends and profitability and to develop best cyber practices for a healthier marketplace.”
To obtain a complete copy of this market segment report, go to http://www3.ambest.com/bestweek/purchase.asp?record code=320999.