Insurers attacked for sudden loss of cyber capacity

German risk managers are not happy with the reduction in capacity, rising prices and new exclusions for cyber coverage that is being carried out with little or no discussion about alternatives, according to Alexander Mahnke, president of the German risk and insurance management association GVNW. During his keynote speech yesterday at the start of the GVNW’s virtual annual Symposium, Mr Mahnke also said that members are struggling with the sudden increase in prices for D&O cover – often over 50% – and loss of capacity in a line he described as a “problem child”. Mr Mahnke said that German risk managers are also unhappy with the trend in general liability as capacity evaporates in key areas such as product recall, and sectors such as the automotive parts supply market. Other sectors facing dwindling capacity and fast rising prices are chemicals, pharmaceuticals and hospitals, he said. The cyber problem is not new. Insurers and brokers have been pushing hard to take cyber cover out of traditional property and liability programmes. They have instead packaged protection as a standalone cover because of concerns over the accumulation of cyber exposures across various lines of business. Many risk managers have resisted these efforts, accusing insurers of merely attempting to generate fresh sales by creating a new line. Based on Mr Mahnke’s comments, it seems that this process has seemingly been intensified by the pressure placed on insurers from big underwriting and investment losses caused by Covid-19. “According to a market report from a major broker, the market for cyber insurance has grown by 23% in the past five years, faster than any other sector. This was accompanied by continuous sales pressure that was built up by brokers and insurers on policyholders and aimed at taking out independent cyber covers,” said Mr Mahnke. “However, many companies that have gone through the complex process that then led to such cyber coverage are now just starting to see themselves with a significant reduction in capacity along with an increase in premiums and the restriction of conditions,” he continued. “From our point of view, this is extremely regrettable, and, unfortunately, it cannot bolster confidence in the solutions offered by the industrial insurance market if new insurance policies recently introduced are called into question after such a short time by the insurer, and thus the promises originally made are not upheld,” said Mr Mahnke. “This fits in with the ongoing attempts by many insurers to enforce broad, generally applicable cyber exclusions within their policyholders in traditional industrial insurance lines,” he added. Mr Mahnke said insurers had clearly not adequately analysed accumulation of cyber risk between the various insurance lines in the past. The GVNW president said that because of this failure, attempts are now being made to solve the problem “without further discussion with customers” and broad exclusions “without discussing and offering alternatives”. “This development gives cause for concern. Cyber risks continue to increase for companies – everyone agrees on this. The reduced offer of cyber insurance and the introduction of exclusions in traditional covers will create coverage gaps and these gaps will not be closed,” added Mr Mahnke. The risk manager said that he and fellow GVNW members also find it “strange” that in many cases cyber exclusions are simply being translated from the Anglo-Saxon insurance markets in the UK and US. As these exclusions are applied to the European legal environment, it will lead to the same problems that occurred within D&O insurance in the past, he said. “One could, and should, certainly learn from mistakes in the history of the D&O insurance market and not repeat them,” said Mr Mahnke. The GVNW president described the current D&O market as a “problem child” that is rapidly running short of capacity. “The reduction in capacity in the market is particularly noticeable. Some insurers have already withdrawn from the D&O market. Initially this was mainly in the case of major risks, it now also affects medium-sized companies,” said Mr Mahnke. “This is accompanied by significant premium increases, in some cases well over 50%, and restrictions on conditions. Known and potentially new major losses, especially in Germany, are leading to a further loss of appetite among D&O insurers,” he added. He noted, however, that D&O underwriting adjustments are not a big surprise given the market was not “technically adequate” in terms of price and conditions in the past. But Mr Mahnke also pointed out that during recent market consolidation customers were “repeatedly” told there would be no noticeable reductions in capacity or bottlenecks. “This is now evidently not the case,” she said. For obvious reasons D&O is a particularly high-profile risk in the boardroom. The sudden loss of capacity and spiralling prices therefore does not help risk managers when they are trying to sell the value of insurance, pointed out Mr Mahnke. “This is a line that is under management scrutiny within policyholder companies like no other. An overly erratic handling of prices and capacities can lead to a rapid and large loss of confidence among the decision-makers within companies and this then affects all branches and books. The damage can only be recovered years later if at all,” he said. “Those of us who experienced the last tough market around 2003/2004 will recall, especially with D&O insurance, how quickly some disappointed policyholders terminated long-term partnerships with insurers across all lines of business,” added Mr Mahnke. He said that capacity bottlenecks and significantly rising premiums are also noticeable in liability insurance, particularly product recall and for auto parts suppliers. “In addition, chemical and pharmaceutical companies and hospitals continue to face challenges as they struggle to find adequate capacity and face higher premiums,” said Mr Mahnke. German risk managers also face difficult renewals for property and business interruption coverage as premiums continue to rise sharply in these core lines. “For some industries and for risks exposed to damage, it is now difficult to obtain adequate insurance coverage in terms of scope and amount,” said GVNW’s president. As has been well documented, the German industrial fire market has lost money for years and leading players such as HDI Global and Allianz Global Corporate & Specialty (AGCS) have been vocal about the need for change. The latest figures from the German Insurance Association (GDV) suggest, however, that this core market is improving from a claims perspective at last. Mr Mahnke pointed out that total losses incurred by this market in 2019 was “only” €1.1bn. “This is the second lowest inflation-adjusted major loss expense in the entire last decade and almost €1bn lower than in 2018. With an average inflation-adjusted major loss expense of €1.4bn, this expense is well below the long-term average… and the industrial insurance market in particular benefited with only €660m incurred claims, the lowest figure since 2002 adjusted for inflation. Of course, we hope that this will be taken into account when determining the bonus for customers,” he concluded.

Insurers attacked for sudden loss of cyber capacity

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