Ample capacity for cyber insurance as risks improve

There is ample capacity in the cyber insurance market to meet current demand, with most insurers demonstrating increased appetite for cyber risk, according to Aon. Looking at the January reinsurance renewals, Aon said demand for cyber catastrophe reinsurance protection is at an all-time high. “The market’s first cyber cat bond and talk of a US federal cyber backstop signal an exciting new phase for the market,” said the broker. It noted that after a period of rapid and intense hardening in 2021, the cyber insurance market is now in ‘positive’ territory, despite an uptick return of ransomware activity in 2023. “The frequency and severity of ransomware attacks, the main driver for cyber insurance claims in recent years, started to tick upwards in 2023, following a reduction in activity in 2022 as ransomware groups were affected by the Russia-Ukraine conflict and an increase in law enforcement,” said Aon. It pointed out that while 2022 underwriting performance was profitable from improved underwriting discipline by insurers, 2023 faces relative headwinds due to an uptick in ransomware and the competitive pressures on pricing. “While competition has undoubtedly increased, metrics from Aon’s CyQu3 risk assessment show that the cybersecurity posture of organisations seeking cyber insurance continues to improve, especially for large commercial cyber risks,” said Aon. “Also, the improved underwriting discipline made by insurers in 2023 cannot be discounted since the large spike in ransomware claims experienced by the market in 2020. This activity was driven by frequency, and subsequent attritional loss across a large spectrum of policyholders. In the aggregate, it pushed loss/combined ratios to an unsustainable place.” The broker continued: “The economics are favourable due to pricing corrections from 2020 through 2022, but the stability of loss ratio performance despite the massive uptick in reporting in 2023 also suggests security control improvement seems to be improving the attritional aspect of portfolio management down market.” Cyber risks are becoming better risks, according to Aon, while at the same time, an insurer’s ability to understand cyber, select risks and manage exposures is continually improving. It said that as long-term confidence in the cyber market continues to build, insurers are looking to reduce the amount of business ceded to reinsurers. Aon Securities was responsible for structuring and distributing the market’s first 144A cyber catastrophe bond in November 2023, providing AXIS Capital with $75m of fully collateralised indemnity reinsurance protection for systemic cyber events on a per occurrence basis. “The transaction received broad investor support, and demonstrates catastrophe bond investors’ ability to work with insurers to provide meaningful catastrophe-based cyber protection,” said Aon. Finally, there is encouraging progress on a potential federal backstop for catastrophic cyber risk in the US, which would build on a similar public-private sector solution for terrorism, said Aon. It added that if the backstop is enacted to complement capital participation on catastrophic cyber risk, much-needed coverage clarity and protection against tail events will help to free up capital to support growing demand for cyber insurance. “Improving coverage certainty and developing a market for cyber catastrophe protection at scale is critical if the industry is to unlock the huge growth potential in the cyber insurance market,” said the broker.

Ample capacity for cyber insurance as risks improve

Insurers showing increased appetite for cyber risk

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