US Cyber Insurance Sustains Profits, Premium Growth Slows

According to Fitch Ratings, the US cyber-insurance sector maintained robust direct underwriting profits in 2023 for the second consecutive year. However, growth in written premiums has tapered off amid renewed pricing pressures.

For stand-alone cyber coverage, Fitch found the direct incurred loss and defense and cost-containment (DCC) expenses ratio remained relatively stable at 44 percent in 2023, as compared to 43 percent in 2022. Despite challenging years in 2020 and 2021, this ratio has averaged a profitable 48 percent over the past 9 years.

Factors contributing to favorable cyber-underwriting results include previous significant premium rate increases, heightened scrutiny in risk selection and underwriting processes, tighter policy language with stricter terms, and increased use of sublimits and exclusions, Fitch said.

In 2023, US statutory direct written premiums for cyber coverage, including stand-alone and package policies, experienced a modest 2 percent decline, marking the first decrease on record. This contrasts sharply with the market's growth of approximately 200 percent from year-end 2020 to year-end 2022. The reversal occurred even with continued growth in demand for coverage and insurers keen on expanding their cyber-underwriting portfolios despite weaker pricing trends, Fitch said.

Stand-alone cyber coverage, which constitutes 69 percent of all industry written premiums, saw a 3 percent decline to $4.9 billion in 2023, said Fitch. However, sustaining current levels of underwriting profitability may prove challenging as cyber-insurance pricing is expected to remain flat or decrease.

According to Fitch, market surveys indicate a significant moderation in pricing, with average cyber-renewal premium rate increases at less than 1 percent in the fourth quarter of 2023, compared to 15 percent and 34 percent in the same period of 2022 and 2021, respectively.

Marsh reported a consistent decline in US cyber-renewal rates over the last three quarters, including a 4 percent decrease in the fourth quarter of 2023. New capacity continues to enter the market (notably via the managing general agent channel) despite concerns regarding ransomware and cyber-catastrophe exposure, according to Fitch.

Also worth noting, Fitch said statutory cyber-financial data may not fully reflect segment profitability, as it excludes all underwriting and adjusting expenses as well as effects on premiums and losses from ceded reinsurance (insurers typically purchase considerable reinsurance protection for cyber). Moreover, cyber-insurance faces challenges from evolving regulatory requirements and the potential for substantial losses from cyber events, including regulatory fines and litigation risks resulting from recent US Securities and Exchange Commission cyber-risk management data breach disclosure requirements for public companies.

Moving forward, Fitch believes insurers will need to maintain underwriting discipline amid heightened market competition and navigate an evolving claims environment influenced by technological change. Furthermore, catastrophe exposure from cyber risks adds another layer of uncertainty regarding the severity, frequency, and financial implications of major cyber incidents. This uncertainty persists due to the less advanced nature of risk modeling for large-scale cyber events compared to natural catastrophe risk models.