Cyber is widely regarded as the fastest growing insured risk globally, but a lack of adequate modelling capabilities and meaningful historical data means that too much cyber coverage growth too soon, would be credit-negative for insurers and reinsurers, according to Fitch Ratings.
Roughly 50 insurers throughout the world now offer some form of cyber protection as a standalone product. With reports from market analysts that 2014’s estimated $2 billion of global cyber insurance premiums could multiply up to five times by 2020, insurers, reinsurers, and insurance-linked securities (ILS) players are eager to develop solutions that address the issue.
However, as highlighted by Fitch Ratings in a recent report on the global cyber insurance market, a lack of historical data and inadequate modelling of the exposures, plus a lack of understanding, limits the adequacy and efficiency of solutions, meaning some existing products could leave companies overexposed post-event.
Owing to the wealth of unknowns surrounding cyber risks, which includes uncertainties around cyber attacks in one business line impacting numerous others, and also systemic risks between companies following an attack, Fitch warns against rapid growth in the cyber insurance market.
“At this stage, Fitch would view aggressive growth in standalone cyber coverage, or movement to high portfolio concentration in cyber, as ratings negatives. Underwriting, pricing and reserving uncertainties currently outweigh the potential earnings growth benefits,” said James Auden, Managing Director at Fitch.
The warning from Fitch should be noted by insurers, reinsurers and ILS market players, all of which are eager to have a meaningful influence on cyber coverage as it as seen as a good area for growth, both in terms of geography and risk diversification.
Modelling capabilities will undoubtedly improve over time, and new cyber risk accumulation management tools and exposure datasets from risk modellers in collaboration with brokers, insurers, and reinsurers, is certainly a step in the right direction.
But the message from Fitch is an important one for the industry’s participants if they want to avoid any potentially crippling surprises and mitigate any overexposure.
Artemis discussed this time last year the scope for capital markets, as well as insurance and reinsurance capacity to close the reported $1 billion cyber protection gap. And albeit slow, some advances have been made in relation to coverage and modelling, a sign that the industry is seriously looking at cyber as one of the next big growth areas.
Interestingly, Fitch highlights the potential risk of insurers and reinsurers being subject to cyber attacks themselves, so the need to create affordable and effective cyber solutions is required to keep their own sensitive data safe from attacks, as well as the potential profits of protecting other companies in all industries.
The opportunity for insurers, reinsurers, and ILS market participants to innovate and create adequate products for cyber threats is huge, but as highlighted by Fitch, there’s a real need for improved modelling and greater historical data.
Unfortunately, historical data is a result of past attacks, so it’s possible that in order to create solutions that adequately protect the widespread exposures and help re/insurers understand just how far-reaching different type of attacks can be more cyber losses will need to occur.
Cyber is an extremely complex risk, but also one of the fastest growing exposures across the world owing to the increased interconnectedness of the world as it moves closer to an all digital world.
It will be interesting to see just how much progress insurers, reinsurers, capital markets and ILS players can make in the cyber coverage landscape over the coming months, as companies and organisations across the globe increasingly need adequate, and affordable solutions.
The key is to not seek to make progress too aggressively, or accumulations may go unnoticed and exposures creep up. Finding solid partners, in terms of risk analysis, technical know how and product design will all help.
Vital in the currently soft reinsurance market is not to let attractive cyber rates cloud judgement. The last thing already under pressure reinsurers need is to take on opaque risks that, when it comes down to it, are not fully understood.