Geneva Association report highlights cyber insurance challenges

A study by the Geneva Association reveals that cyber insurance offerings and premium volumes have expanded considerably and loss ratios have compared favourably relative to other product lines. But “keeping up with demand is challenging and sustainable growth in the cyber insurance market should not be taken for granted as accumulation risks need to be addressed in the context of a hyperconnected digital world”, it adds. The study, titled Advancing Accumulation Risk Management in Cyber Insurance, states that cyber risk awareness in large and small businesses is increasing, and demand for insurance will likely be strong for some time. But it explains that there are three prerequisites to ensure the sustainability of cyber insurance: customers and insurers must facilitate resilience at the source of risk; insurers need to make an acceptable return on capital; and available capital must absorb shocks from accumulation risks. “Expanding the boundaries of insurability is not new for insurers. However, cyber risks are taking us into uncharted territory. Both exposures and threats have distinct characteristics, bringing unprecedented challenges,” commented Anna Maria D'Hulster, secretary general of the Geneva Association. The report points out that cyber risk creates several unprecedented challenges: Exposure bases are hard to define and measure, and they are constantly changing Historical claims data is scarce and not considered to be well representative of future vulnerabilities Threats are constantly evolving; they can spread widely and rapidly, and a series of consecutive large events is plausible A high degree of interconnectivity may result in potentially unbounded impacts. It says these challenges require insurers to strengthen their core underwriting capabilities, in particular exposure measurement, claims assessment, and accumulation modelling. The report finds that insurers have taken several steps to make it manageable, including playing an active role in helping companies build resilience, a trend that is expected to continue. Daniel Hofmann, senior adviser, financial security and insurance economics at the Geneva Association, and primary author, commented: “Cyber risk has distinct characteristics. Exposure bases are hard to define and measure. Historical claims data is scarce and not a good predictor. Threats are constantly evolving, can spread widely and rapidly, and a series of consecutive large events is plausible. Moreover, a high degree of interconnectivity may result in potentially boundless impacts.”. In response, insurers have developed several approaches: Developing data analytics that analyse the characteristics of cyber risk, as well as data protocols that combine company information with digital risk indicators Novel approaches to analysing the risk 'footprint' and corresponding threats impacting the 'size of the footprint'; for example, applying the mathematics of epidemiology to the spread of computer viruses Mapping cloud-related interconnectivity and digital supply chains, and using machine learning to assess the relationship between claims frequency and multi-dimension exposure. The report highlights four cyber accumulation risk challenges: A single large event or a series of consecutive events may make affirmative cyber insurance unprofitable Insurers and reinsurers could underestimate cyber exposures resulting in unplanned shocks from a major event Data of insufficient quality for more advanced modelling techniques Governments predominantly fail to provide frameworks for the sharing of cyberterrorism-induced losses. As a result of these challenges, insurers and reinsurers could withdraw from the market after unacceptably high losses and fear of repeat events. In addition, growth of the small alternative capital market may be stalled and prevent insurers from accessing needed capacity, while re/insurers could introduce tighter policy terms and in doing so increase the number of exclusions and/or make buybacks prohibitively expensive, notes the report. On the issue of cyberterrorism, the report explains that governments have started to consider extending, or have started signalling their readiness to extend, existing arrangements for terrorism coverage to include property damage and the related business interruption from events caused by acts of cyberterrorism. “While there are still questions about definitions and attribution, the willingness of the public sector to take the cyberterrorism risk off the table will undoubtedly be a meaningful step towards inducing further private capacity to enter – and stay in – the cyber insurance market,” it states. The report concludes: “Provided that underwriting discipline is maintained, the report is cautiously optimistic that insurers are well positioned to ensure the cyber insurance market’s viability and achieve sustainable growth in the future. This cautious optimism in the market’s growing capabilities is also underscored by capital levels that currently are sufficient to support cyber risk underwriting in line with limits established by insurers.”

Geneva Association report highlights cyber insurance challenges

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