The U.S. cyber insurance market continued strong growth in 2022, with direct premium increasing by 50% to $7.2 billion and improving loss ratios given greater attention to underwriting discipline, according to a new AM Best report.
The Best’s Market Segment Report, “US Cyber: First Hard Market Cycle Brings a Return to Profitability,” notes that direct premiums written (DPW) has tripled in the past three years with surging demand, far outpacing that of the broader commercial lines industry by a wide margin. Calendar-year results improved dramatically in 2022 following two straight difficult years, as insurers benefited from continued rate increases, tighter underwriting and a decrease in ransomware attacks. Compared with 2021, the loss ratio fell 23 percentage points to 43% on standalone policies, and 18 percentage points to 48% on packaged policies.
“Underwriters have used every item in the proverbial toolbox to manage exposures. In addition to the rate increases, underwriters have cut limits, increased insureds’ own retention and improved risk selection,” said Christopher Graham, senior industry analyst, industry research and analytics, AM Best. “With the cyber universe expanding and becoming more complex with artificial intelligence creating new exposures and ransomware attacks returning to prominence in 2023, the demand for cyber coverage will only increase.”
According to the report, the cyber insurance market continues to shift away from packaged policies, with standalone ones now the preferred policy among larger insureds. More than 70% of cyber premium is written on standalone policies, with the 2022 total standalone DPW exceeding all 2021 cyber insurance premium. AM Best views this trend as welcome news for the industry, as it may reduce disputes and litigation costs.
In another market shift, surplus lines writers now account for a majority of cyber insurance premium, the report states. From the time the NAIC started collecting data on cyber insurance in 2015 until the hard market of 2020, surplus lines companies held a relatively steady 25% share of the cyber market. However, since then, cyber premium written by surplus lines insurers increased by more than 500%, now representing nearly 60% of total cyber market premium.
Even with the decline in ransomware claims during 2022, first-party claims remain close to 75% of the nearly 27,000 reported claims as business e-mail compromise claims increased. The number of third-party liability claims is also still significant, and these claims will have some tail in development. In addition, war risk exclusions vary by company, with some carriers sticking with traditional war exclusions and others accepting certain war exposures.
“Systemic risk is an ongoing concern. Property catastrophes typically affect a limited geographic area, but a cyber catastrophe, as we saw with NotPetya, can go worldwide,” said Fred Eslami, associate director, AM Best. “As the definition of war becomes broader, so may the exclusion as well, which could lead to insureds with less coverage. Ultimately, the coverage provided to insureds may be decided by the risk appetite of the insurer, and to a certain extent, the coverage that reinsurers are willing to provide.”
To access the full copy of this market segment report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=332501 .
A panel of AM Best analysts and other industry experts will discuss trends and challenges in the cyber insurance market, including the rise of artificial intelligence and the return of ransomware attacks, in an analytical briefing set for 11 a.m. (EDT) today, June 13, 2023. To view the briefing, please visit http://www.ambest.com/conferences/Cyber2023/index.html .