Room to grow: cyber demand continues

When AM Best published its market segment report last June, it found US cyber was the hardest of the property casualty markets—and growing fast. Direct premium written rose by 75 percent in 2021 alone. It was an attractive market for insurers, with substantial rate increases despite the loss ratio on standalone policies declining by only 10 percent.

Its new upcoming cyber report, due to be published later this month [June], will likely show continued growth: an AM Best report on the cyber market in March noted that direct premiums in 2022 were estimated at between $8 and $11 billion—from just $2.7 billion two years ago. At that time, the market was no longer showing the level of quarterly price increases peaking at 34 percent in the fourth quarter of 2021—but it continued to be attractive.

That’s as true for reinsurers, in Bermuda and elsewhere, as primary carriers. “There’s been increasing demand as well as a very favourable loss experience over the last several years,” according to Greg Dickerson, director at AM Best. With loss ratios from under 50 percent, it has been “a very profitable business”.

For reinsurers, there’s another factor, too: it offers attractive diversification. “An increasing number of reinsurers are moving away from the traditional nat cat volatility into casualty and specialty lines, with some companies very public about their desire to cut back on exposure; in several cases, they may be exiting it altogether,” explained Dickerson.

“In that context, cyber has had a favourable diversifying impact on their overall portfolios.”

Market cooling

Despite this, however, re/insurers remain cautious about the class. In part, that’s because after relatively low losses in recent years, the move to remote working due to the COVID-19 pandemic caused them to edge up.

“That’s when we saw an increase in first-party—as opposed to third-party—claims, particularly due to ransomware. It started to be not as profitable,” explained Christopher Graham, an AM Best senior industry analyst. And, while the hard market cycle of 2021 and 2022 helped make the market profitable again, rates have now cooled. In the first quarter of 2023, according to Graham, they barely kept pace with inflation.

Ransomware claims now look to be returning—making all re/insurers cautious, and increased capacity has also had an impact. “Competition in this area has picked up,” said Dickerson. “More reinsurers are willing to write the business, and that will suppress some of the rate improvement going forward.”

The caution extends even to those increasing their exposure, however—and they are doing so very prudently, according to Dickerson. Others remain hesitant to touch it. “They view it very cautiously—in some cases as borderline uninsurable,” he said.

Early days

The lack of a retro market doesn’t help, even if that’s expected to develop over time. However, that is a symptom of the more significant issue: cyber remains a relatively new risk, and the ability to model it is limited.

“Compared to more developed nat cat models, it’s still in the developmental stage,” said Dickerson. If some are keen to diversify into cyber due to what the models say about escalating nat cat losses, others want a clearer take on cyber before committing.

“Uncertainty with the ability to model the large systemic losses makes many nervous,” he said. The big names dominate the market, Graham pointed out, with Chubb, Fairfax, and XL the market leaders.

“We are talking about the larger companies who can do this,” he said. None of this, however, is likely to stop cyber being a growing market—not least because it’s still from a low base and a relatively small part of most underwriting portfolios, Dickerson noted.

Capacity will be affected by the losses seen, but with loss ratio caps and exclusions for war and infrastructure in place as standard, future growth looks likely.

“All else being equal, we would expect the demand for cyber reinsurance to increase at a rapid rate for a prolonged period,” said Dickerson. “The increasing interconnectedness of the economy, plus reliance on technology and its importance to our economy, will continue to drive high growth.”

Or, as Graham put it: “The demand is going to keep growing because every company is a tech company. They’re all relying on it. As long as people are using computers, and we’re all connected through the internet and internal networks, there will be demand for coverage.”