Cyber rates to plateau as market reaches ‘equilibrium’, says Moody’s

Moody’s believes that cyber insurance rates will flatten or increase slightly in the near term as the market enters equilibrium after drastically improving profitability over the past few years. It adds that moves by insurers to introduce more restrictive cyber war clauses have seen some buyers look to switch carriers to avoid the most restrictive wordings. The ratings agency says in a new report that cyber insurance rate increases have moderated “significantly” over the last 12 months. It notes the cyber rates were up 11% in the first quarter of this year, according to Marsh figures, from increases of mid-to-high double digits just a year ago. Moody’s says pricing is levelling off after profitability improved at cyber insurers and capacity constraints eased. “Following the escalation of ransomware attacks, standalone cyber insurance losses began to rise at a fairly brisk rate, peaking in 2020 at 65%, before moderating slightly to 62% in 2021. However, the cyber insurance loss ratio (incurred claims as a share of premiums) fell sharply during 2022, declining to 38%, a figure not approached since 2018. When including defense costs, the ratio increases to about 43% in 2022. Assuming an average expense ratio of 30%, the estimated combined ratio for standalone cyber insurance was about 73%, generating a significant underwriting profit,” it says. The ratings agency adds that improved profitability and falling losses are down to several factors. Firstly, insurers raised rates sharply and tightened terms and conditions to more closely align pricing with the risk. Secondly, carriers often required insureds to improve their cyber hygiene to obtain coverage. And thirdly, policy language began to better reflect the risks that were covered and excluded. Moody’s believes that the cyber insurance market has entered equilibrium, with demand and supply becoming more balanced. It now expects pricing to “remain flat to slightly positive in the near term given anticipated increases in cybercrime as well as the growing use of digital technology”. It says new carriers have begun writing cyber insurance, and additional reinsurance capacity has come online to help satisfy growing demand. The report notes that demand still outpaces supply but predicts the market will likely grow significantly in the coming years because the vast majority of cyber losses remain uninsured. It adds that insurers remain focused on aggregation risk, with cyber war exclusions a contentious issue in the market. Insurers have made moves to remove war cover, firstly in silent property cover and then in standalone cyber policies. Moody’s says movements to limit systemic cyber risk through war exclusions has, however, recently been met with “some resistance” in the marketplace. It says that brokers have seen clients shop for new carriers rather than sign onto much more restrictive policy language. The report adds that although cyber regulations and legal systems vary significantly around the globe, governments and regulators in regions including the US, EU, Canada and India have all proposed rules or introduced measures that will tighten cybersecurity and disclosure requirements.

Cyber rates to plateau as market reaches ‘equilibrium’, says Moody’s

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