Cyber market to see fluctuating prices and dynamic contract conditions, says S&P

Price fluctuations are likely to be an ongoing characteristic of the cyber insurance market, together with dynamic contract conditions, according to a report on the market from S&P Global Ratings. The report, Cyber Risk In A New Era: The Rocky Road To A Mature Cyber Insurance Market, says insurers have realigned contract terms and conditions, increased retention levels and reduced coverage for specific types of loss, especially in relation to ransomware and business interruption coverage. S&P notes that cyber insurance is the fastest-growing subsector of the insurance market, though substantial rate adjustments rather than underlying growth in the size or volume of contracts is responsible for much of the recent increase. The ratings agency says that reflects a growing number of (re)insurers' hesitancy to underwrite large cyber risks (and some providers' reduced risk appetite) due to more frequent and severe cyberattacks, and greater systemic risk. Cyber insurance premiums topped $9bn in 2021, according to Munich Re, and that figure is likely to increase at an average 25% per year to about $22.5bn by 2025, according to S&P Global Ratings. “That growth might seem to be a sign of a burgeoning cyber insurance market but rising rates accounts for much of the increase in total premiums over the past two years, rather than an increase in the number or size of insurance contracts. Improvements in risk modelling will be necessary if further growth is to reflect increased market capacity, driven by (re)insurers’ greater risk appetite, rather than still higher rates underpinned by a supply-demand mismatch due a reluctance to take on new risk,” the report states. It explains that ongoing price fluctuations arise from the emergence of new risk differentiation models and variable pricing that incorporates emerging cybersecurity standards and improvements in cybersecurity systems. It says this variability has become a key pillar of (re)insurers' efforts to create sustainable cyber insurance products, but has in some instances led to the cancellation of contracts where policyholders have failed to meet security standards and thus an acceptable risk-return profile for (re)insurers. “It has become common practice for insurers to decline requests for cyber cover if a potential policyholder lacks comprehensive IT system backups, endpoint-detection technology, a protocol that ensures ongoing patching of IT systems, defined cyberattack response measures, or multifactor authentication,” says the report. S&P believes that making a steady profit from cyber will remain challenging for insurers. “We believe an overly aggressive expansion into the cyber insurance market, without effective risk controls, could be detrimental to insurance companies' risk exposure, their capital position and their earnings,” says S&P Global Ratings analyst Manuel Adam. The ratings agency thinks that insurers should focus on quality, in the context of cyber insurance wordings, rather than quantity. A proliferation of imprecise cyberwar exclusions could hurt the development of a sustainable cyber insurance market, which is in no-one's interest, it says, adding that clear policies, with precise wording, are key to the sustainable development of the cyber insurance market, as highlighted by concerns about the contractual treatment of cyberwarfare in the wake of the Russia-Ukraine conflict. The S&P report concludes: “A stable market is in the interest of policyholders, who will benefit from greater certainty of coverage and lower costs; and insurers, who will be better able to match products to their risk appetites while also reducing the volatility of returns. We believe clearer policies will be at the forefront of those efforts, but that it will also necessitate a deeper understanding of how ransomware drives losses, improvements in scenario modelling, better management of risk accumulation and disciplined underwriting.”

Cyber market to see fluctuating prices and dynamic contract conditions, says S&P

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