The US cyber insurance market is anticipated to maintain favorable premium growth and underwriting results through 2023; however, pricing will likely moderate further this year in response to recent profits and competitive factors, Fitch Ratings says.
Average cyber renewal premium rate increases have decelerated, with a 15% sequential-quarter increase in 4Q22 down considerably from a record 34% increase in 4Q21, according to The Council of Insurance Agents & Brokers’ Commercial Property/Casualty Market Survey. Fitch estimates industry statutory direct written premiums for cyber coverage in standalone and package policies increased by over 50% in 2022 to $7.2 billion, following 73% premium growth in the prior year. Stand-alone cyber coverage, which represents approximately 70% of industry premiums, increased by 62% in 2022.
Rising policyholder awareness of the multi-faceted cyber threat continues to boost demand for coverage. Rapid recent premium growth and a reduction in claims experience in 2022 led to a strong recovery in results for the US Cyber insurance line following two consecutive years of more elevated loss ratios.
Insurers saw an acceleration in market premiums relative to already strong growth according to data compiled from cyber insurance supplemental filings in statutory financial statements. For standalone cyber coverage, the direct incurred loss and defense and cost containment (DCC) expenses ratio improved significantly to 43% in 2022 from 68% a year earlier.
Sharp growth in earned premiums and slower expansion of reported claims and incurred losses drove improvement in results. This was due in part from a moderation of ransomware incidents, an elevated level of awareness of cyber risk at executive levels, and more stringent enforcement of cyber hygiene standards by insurance companies. The costs of defending and settling cyber claims is becoming more burdensome, with defense costs and containment (DCC) costs rising significantly in 2022.
The improvement in direct cyber results also reflects a more cautious approach by insurers to underwriting and risk selection, resulting in sharply higher premium rates in the last two years. Insurers serve a role in promoting effective cyber risk management practices for policyholders, and have become more insistent that insureds demonstrate practices that include use of dual factor authentication, diligent system updates and patches, and frequent employee cyber training as part of the application process.
However, 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.
The claims environment remains more uncertain relative to other property/casualty products, in part due to the rapid pace of technological change and potential for new types of cyber incidents. Underwriters and modeling experts are active in developing tools to measure and manage risk aggregations and large loss exposures, but the nature and probability of loss of various potential cyber catastrophes remains highly difficult to project.
Further commentary on segment results and company market share is forthcoming in Fitch’s more detailed update report on the US Cyber Insurance Market with an anticipated May release.