Cyber Market May Be Cooling, Even as Premium Growth Continues

A slower pace of rate hikes combined with reduced capacity suggests that the cyber liability insurance market might be cooling, according to A.M. Best.

In a Best's Commentary, "Hot Cyber Market Is Cooling: Solutions to Address Systemic Risks Needed," the rating agency notes that strong demand for cyber insurance and substantial rate increases have made cyber insurance the fastest-growing segment in the US property-casualty market.

Best estimated that direct cyber-insurance premiums written in 2022 ranged between $8 billion and $11 billion, up from $2.7 billion just 2 years ago. While average quarterly price increases remain high, they have slowed somewhat since peaking at 34 percent in the fourth quarter of 2021, Best said, while at the same time, insurers have become more conservative with limits and shares.

Insurers have increased their focus on managing aggregate cyber exposures given potential systemic risks, Best said.

"Cyber risks have no seasonal or geographic limitation," Christopher Graham, senior industry analyst at A.M. Best, said in a statement. "A cyber event could start in Europe, spread to North America, and then across the Pacific Ocean into Asia. The spread of cyber events across borders prevents insurers from diversifying cyber risks."

According to Best, as the cyber market evolves, new capacity solutions have emerged. "Quota share reinsurance has become popular among insurers who are uncomfortable with cyber risks and need reinsurance expertise and capital for underwriting," the Best statement said. "The insurance-linked securities (ILS) market also has made some inroads into the cyber market, providing extra capacity."

Best noted, however, that the cyber-insurance market has yet to face a catastrophic loss, and any cyber catastrophe could cause the markets to revisit those reinsurance and ILS solutions. As a result, insurers and reinsurers are beginning to incorporate catastrophe loads into their pricing models, the rating agency said. "Like the property insurance market, cyber insurers are increasingly differentiating between attritional and catastrophe losses," the Best statement said.

"A well-designed government backstop may allow insurers to offer more capacity and minimize the protection gap in cyber insurance," Sridhar Manyem, senior director of industry research and analytics at A.M. Best, said in the statement. "However, underwriters are best positioned to respond quickly to changing market conditions, while government regulators, challenged by bureaucratic and political considerations, might not be as nimble to react."