Closing the protection gap would create $100 billion cyber opportunity

With cyber economic losses over hundred times the total market premium, there is considerable potential for closing the insurance protection gap, according to a recent report by McKinsey.

The Global Insurance Report 2023 notes that cyber economic losses in 2020 totalled $945 billion more than one hundred times the total premium market ($9 billion in 2021), indicating a massive protection gap. Even if only a fraction of these losses is insurable, the report suggests, this could translate to a more than $100 billion growth opportunity for the global commercial-insurance industry.

The report also says that that cyberthreats pose a significant accumulation risk—for example, when targeted at critical infrastructures, such as water or energy—with potential implications across the entire insurance and reinsurance portfolio, adding that the occurrence is unpredictable, and the risk characteristic is constantly evolving. 

As a result, McKinsey said, commercial carriers are struggling to properly quantify risk exposure and adjust terms and conditions, as well as wordings—also, to consequently win the conviction of reinsurance capacity:

“This is rapidly evolving, however, as new frameworks to define cyber catastrophes are emerging from multiple commercial carriers. For instance, 2023 saw the placement of the first cyber catastrophe bond.”

Nonetheless, it added, widespread technological shifts have permeated nearly every aspect of work, especially with the rise of remote work environments, cyber risk has become ubiquitous. As a result, commercial carriers have recently enacted rate increases, reduced coverages, and added exclusions, such as on state-sponsored acts.

McKinsey has also suggested that there exists considerable potential for the market to upgrade and innovate on product and policy design for risk transfer solutions, especially when it comes to providing coverage for net-zero transition risks, which it suggests are not sufficiently covered by existing insurance today. 

As such, the reports says, commercial carriers must build the capabilities to underwrite prototype-like risks, such as for decarbonisation technologies, including carbon capture and energy storage. While initial insurance products exist, it adds, they are not widely available due to the lack of historical data when underwriting these risks for the first time. Commercial carriers can also support the adoption of carbon markets by offering alternative risk-transfer solutions, including coverages for buyers (for example, to insure a carbon offset becoming invalid) and sellers (for example, to cover nature-based loss from a pest infestation), according to the report.

McKinsey also weighs in on the parametric debate, noting that index-based solutions can also improve the efficiency of natural catastrophe coverages for both clients and commercial carriers as risks become more transparent, while pay-outs are instantaneous and are less exposed to long litigations, reducing the tail of the risk. 

The Global Insurance Report 2023 notes that cyber economic losses in 2020 totalled $945 billion more than one hundred times the total premium market ($9 billion in 2021), indicating a massive protection gap.

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