Insurers wrote $1.35 billion in direct cyber insurance premiums last year — but is demand for this product sustainable?
Mirroring the rise in malicious data security breaches, property and casualty insurers wrote $1.35 billion in direct premiums for cyber insurance in 2016, a 35% rise from the previous year. Well-publicized cyber attacks like the “WannaCry” ransomware virus that infected 200,000 computers in 150 countries in May, as well as the recent malware intrusion in Europe, Asia, and the US, no doubt propelled those sales.
The alarming frequency of these attacks have pushed companies to purchase cyber insurance to secure their data and recoup losses in the event of a costly breach. “Take-up rates for cyber insurance are increasing, with frequent reports of computer hacking incidents, including network intrusions and data theft, as well as high-profile ransomware attacks that are leading corporations to search for broader insurance protection against cyber threats,” said Jim Auden, Managing Director at Fitch.
Tech giants Apple and Cisco recently announced a joint effort to offer customers sharing their systems a discount on a cyber-security insurance premiums. The two companies declared that they would be “collaborating with insurance industry heavyweights…to offer more robust policies to our customers.”
A Shift Toward Standalone Policies
In its report, Fitch contends that $1.35 billion may underestimate the industry’s actual premium exposure because cyber security coverage might be part of a multi-line package as opposed to a standalone policy. But in an indication of cyber insurance’s growing importance to the industry, insurers were found to be increasingly underwriting separate policies for cyber insurance instead of bundling coverage with other contracts.
The researchers estimate nearly 70% of all direct premiums were written in a standalone contract in 2016 as major insurers move in that direction. The top five underwriters backed 81% of the $669 million in standalone policies, which lead to more accurate pricing and reserving formulas. Such policies also enable insurers to better aggregate risk in what is an still emerging market.
It’s a Profitable Market, But Is it Sustainable?
Several big names in the insurance industry are grabbing a significant foothold in the cyber risk market. The researchers ranked American International Group, XL Group, and Chubb as the leading underwriters in this space. The three held a combined market share of roughly 40% in 2016.
Those underwriters booked rising profits as the direct loss ratio fell from 51.4% in 2015 to 46.9% last year. The study pointed to the prevalence of ransomware for propping up company profits — ransomware typically results in losses below deductibles and short-term damage easily rectified by simple backup recovery efforts.
Although Allianz predicts cyber insurance premiums will hit $20 billion per year by 2025, the report cautions that cyber insurance is a relatively young product. Demand soars after reports of major cyber breaches, which may not be a true indicator of how deep or sustainable demand really is. Companies may purchase cyber insurance in response to headlines about data attacks, but decide they don’t need it when news subsidies.
A Time for Caution
Insurers also need to study more cyber-related loss events to correctly underwrite and price risk. A more mature market will give insurers a sharper outline of their exposure.
“Future growth in cyber premiums will likely come from more consistent policy terms and conditions as insurers gain better understanding of loss potential and coverage, better cyber underwriting models, as well as efforts to comply with increased cyber regulatory standards across numerous industries, particularly financial institutions,” Auden said.
Cyber insurance may not be exclusive to major companies much longer, however. Homeowners looking to protect personal data stored on home computers, and in the near future, ward off attacks on smart appliances may turn to cyber insurance. Hartford Steam Boiler, a unit of German insurer Munich Re, now offers “home hacking” policies, according to a report in CBSNews.com.
For insurance agents working with both business and homeowner clients, discussing the possibility of cyber insurance for their homes could be beneficial. However, no carrier should be counting on it as a steady, booming revenue stream just yet — like much else in the tech realm, cyber insurance is an unpredictable market, and the next big innovation could transform it forever.