As the demand for cyber insurance continues to grow, insurers must remain vigilant in managing the changing risk associated with the line of coverage.
According to DBRS Morningstar’s commentary today on the exploding coverage line, while cyber insurance is a market opportunity for insurers, it also presents a different type of risk to manage, one that can be more difficult to value. and price than most other insurance risks.
Along with artificial intelligence, cyber attacks will continue to evolve, meaning insurers will need to monitor and manage risks accordingly.
“The challenge arises in part due to the lack of comprehensive and reliable data given the changing nature of cyber crime, its potentially catastrophic nature as well as the high level of technical expertise required to properly risk it,” the report said.
These challenges can be managed with “Appropriate policy terms and conditions and risk management measures that are effective in managing the volatility of the loss ratio and the prevention of cyber-related losses are critical determinants on insurers’ ability to manage underwriting cyber risk exposures.”
Reinsurance can help mitigate unexpectedly large losses, the commentary said, although limited availability and cost may limit an insurer’s ability to increase its cyber market share.
As the line matures, it is expected that insurers offering coverage will benefit from a source of income with continued high demand and more stable income. The latter will arise as a result of better claims experiencing data accrual, leading to more accurate pricing and stable loss ratios.
While loss ratios increased significantly between 2018 and 2020, improvements were seen in 2021 and are expected to continue in 2022.
The authors of the commentary, Komal Rizvi, vice president, Insurance, Global Financial Institutions Group and Marcos Alvarez SVP and global head, Insurance, Global Financial Institutions Group, expect more refined cyber coverage offerings, the result of a maturing market as well as a better understanding of claims drivers. The evolution of cyber policy occurs faster than in other lines, mainly due to the evolving nature of cyber attacks.
However, there is a risk of restraining growth, due to the high demand for cyber insurance coupled with a large gap in cyber protection, the commentary said.
“Cyber risk can be vulnerable to mispricing because losses can fluctuate widely, and, in some cases, be very high. Losses can be difficult to model and quantify because of the wide range of loss events involved, including reputational damage costs, compensation to any cyberattack victim, business interruption costs, and ransomware claims, to name a few, “the report outlines. .
Because cyber coverage offers insurers a source of income unrelated to catastrophic weather events, it can be beneficial to insurers who may have a large share of their business in the property insurance market.
Another benefit for insurers is the ability to offer services to cyber insurance customers, such as “access to professional advice, evaluation of cyber security processes and methods currently in place, and help prevent injury and prevent further falls once a breach occurs. .”
These services can be valuable to small to mid-sized businesses that do not have the ability to acquire these services on their own.
One caveat remains, the potential for systemic, widespread loss of digital supply chains. This can be solved, according to the report, by sufficiently diversifying the risk pool.
Mitigating risk through reinsurance, along with clarity in policy language, and a disciplined underwriting process is key to managing tail risk.
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