US Cyber Market Likely to Face Pressure Post Pandemic

Ratings firm Fitch has warned that the fallout from the COVID-19 pandemic may have a significant impact on the US cyber insurance sector.

The company has issued a new research report which whilst recognising that the sector continues to be viewed as an attractive growth opportunity by property/casualty (p/c) insurers, there was a need for caution.

“Economic fallout caused by the coronavirus pandemic will likely test recent premium revenue trends and claims experience,” Fitch Ratings said. “Cyber insurance continues to be a small but profitable market, representing a modest portion of premium risk for individual p/c insurers. However, a large unforeseen cyber event, such as a massive cloud intrusion or attack on infrastructure, could result in substantial individual incurred losses that could pressure capital levels and individual ratings.”

Cyber insurance direct written premiums grew by 12% in 2019 to over $2.2 billion versus 8% growth in 2018, with $1.3 billion in cyber stand-alone direct premiums written in 2019, up nearly 14% from the prior year. Industry aggregate cyber direct written premiums for package coverage moved up slightly in 2019 to approximately $900 million,” added the report. Demand for cyber coverage continues to rise. Global broker Marsh reports that 42% of US based clients purchased cyber coverage in 2019, up from 38% in 2018. U.S. cyber market premiums continue to be concentrated within large global insurers, with Chubb Limited, Axa-XL and American International Group, Inc. (AIG) holding combined market share of approximately 36% at year-end 2019.

The research added recent premium rate hardening for the US commercial lines market extended to the cyber segment in 2019, with the Council of Insurance Agents & Brokers fourth-quarter commercial market survey reporting a 2.9% increase in rates for cyber policy renewals. However, Fitch warned 2020 segment premium growth will be tempered by reductions in underwriting exposures from the recent sharp economic contraction tied to the coronavirus pandemic. Cyber coverage purchase practices may change meaningfully in the near term with mounting strain on corporate budgets and profits.

“Cyber insurance remains a profitable niche segment for U.S. insurers, though Fitch believes that cyber underwriting performance will deteriorate as underwriting exposure grows, coverage broadens and the nature of cyber claims evolves,” said a spokesman. “Newer market entrants face challenges in meeting performance of longer-term players due to limited historical pricing and claims information. The industry statutory direct loss ratio for stand-alone cyber insurance rose significantly to 47% in 2019 from 34% in 2018. This figure is just below the 48% loss ratio reported in 2015, the highest industry figure reported in the brief history of cyber supplement reporting.”

The research said claims experience in cyber continues to evolve with changes in technology and the business environment. More stringent privacy and data protection legislation is leading to larger fines and penalties from cyber incidents.

“While data breaches remain the primary source of cyber claims exposures, losses tied to ransomware attacks became more prominent in the past two years,” stated the research. “The recent shift toward more remote work environments is putting a strain on companies’ information security efforts that could lead to more cyber incidents in the near term from network intrusions and more sophisticated phishing tactics.”


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