Cyber insurance carries significant risks for the financial stability of insurers
Cyber insurance can pose significant risks to the financial stability of insurers and reinsurers, because cyber risks are a complex product that requires specialized knowledge and experience.
Despite these challenges, it also opens up opportunities for profitable expansion and innovation in the insurance sector, according to analysts at AM Best.
In the cyber insurance market, premium rates have risen after a sharp rise in the number of claims related to the pandemic. Although recent trends suggest stabilization or reduction in rate increases, the market still offers attractive prices for insurers.
AM Best has released a report that says the expansion of cyber insurance offerings could pose significant risks to the financial stability of reinsurers if not managed with care and ongoing oversight.
Cyber insurance underwriting
Industry approaches to cyber insurance underwriting vary. Some insurers remain cautious about increasing their cyber exposure, while some are looking to reduce their presence in this area. In contrast, others see cyber insurance as a promising area for growth.
This diversity in approach is also evident among reinsurers, who have varying levels of enthusiasm for including cyber risks in their portfolios. Some are actively looking to add cyber insurance to their product mix, while others are more reserved, Beinsure Media research said.
When it comes to cyber risk insurance strategies, reinsurers often prefer deals based on a quota share model with a cap on the loss ratio rather than relying on excess loss coverage.
The focus is on developing insurance programs that accurately reflect the underlying terms of the insurance, including the application of exclusions to manage risk according to their risk appetite.
The study includes an assessment of an insurer’s ability to assess and manage potential cyber losses as part of its rating process. It examines the impact of cyber risks on an insurer’s capital management and distribution strategies.
AM Best is seeing a growing awareness in the industry of the potential for significant losses related to cyber activity. However, it notes that compared to other catastrophic risks, the potential for catastrophic losses from cyber activity is generally considered lower at this stage.
Expansion of cyber insurance offers
The expansion of cyber insurance offerings is a response to the growing demand for cyber threat protection, a trend accelerated by the digital transformation of businesses and the increasing sophistication of cyber attackers. The report examines how insurers and reinsurers are incorporating cyber risk considerations into their reinsurance and retrocession strategies, including implementing risk transfer mechanisms to protect their financial positions.
While cyber insurance offers opportunities for growth and innovation, it requires careful management due to its complex nature. Insurers and reinsurers take a variety of approaches to this line of business, reflecting different levels of risk tolerance.
AM Best emphasizes the importance of integrating cyber risk considerations into broader capital management and risk mitigation strategies to support financial resilience.