The U.S. cyber insurance line generated strong direct underwriting profits for the second straight year in 2023, but written premium volume has stalled amid renewed pricing pressure, Fitch Ratings says.
A first look at data compiled from cyber insurance supplemental filings in statutory financial statements indicates that for standalone cyber coverage the direct incurred loss and defense and cost containment (DCC) expenses ratio held relatively steady at 44% in 2023 versus 43% in 2022. Despite two poor/performing years in 2020 and 2021, this ratio has averaged a highly profitable 48% over the nine years that cyber supplemental data is available.
Favorable cyber underwriting results are partly due to prior large increases in premium rates. Insurers are also being more careful in cyber risk selection and the underwriting process. They are requiring that customers maintain proper cyber hygiene and risk management practices before agreeing to insure them. Additionally, insurers are tightening policy language to more strictly define terms, with more frequent insertion of sub-limits and exclusions.
U.S. statutory direct written premiums for cyber coverage in standalone and package policies declined for the first time on record in 2023 by a modest 2%. This represents a sharp drop off from market growth of approximately 200% from YE20 to YE22. The reversal occurred even with continued growth in demand for coverage and carriers keen on expanding their cyber underwriting portfolios despite weaker pricing trends.
Stand-alone cyber coverage, which represents 69% of all industry written premiums, declined by 3% in 2023 to $4.9 billion.
Current segment underwriting profitability at current levels is unsustainable as cyber insurance pricing is likely to remain flat or down going forward. The Council of Insurance Agents & Brokers’ Commercial Property/Casualty Market Survey reveals that pricing has substantially moderated following rapid rate increases throughout 2021 and 2022. Average cyber renewal premium rate increases were up less than 1% per the 4Q23 survey compared with 15% and 34% in 4Q22 and 4Q21, respectively.
Global insurance broker Marsh reported that U.S. cyber renewal rates were down for the last three successive quarters, including a 4% decline in 4Q23, as new capacity continues to enter the market despite concerns regarding ransomware and cyber catastrophe exposure, particularly via the managing general agent channel.
Statutory cyber financial data does not provide a full picture of segment profitability as direct results do not include all underwriting and adjusting expenses. Effects on premiums and losses from ceded reinsurance also are not considered, and cyber is typically a product for which primary carriers buy considerable reinsurance protection.
Carriers will face ongoing challenges to maintain underwriting discipline as market competition intensifies and adapt to an evolving claims environment that is heavily influenced by technological change. Cyber loss risk is also heightened by expansion of regulatory and compliance requirements, including recent SEC cyber risk management disclosures for public companies, that increase potential for litigation risks and substantial fines and penalties for not properly disclosing data breaches.
Catastrophe exposure from cyber risks is another significant source of uncertainty in terms of the nature, likelihood and cost of the most severe cyber event. Considerable resources are expended by carriers and risk modeling firms to measure risk aggregations and probable maximum losses from larger cyber events. However, these tools remain less advanced than natural catastrophe risk models that have been refined over the last 30 years.