Cyber insurance is the fastest growing product segment in the US P&C insurance market, driven by a sharp increase in cyber incidents, particularly ransomware, that led to higher claim counts and loss severity over the past two years, said Fitch Ratings in a recent paper.
Near-term underwriting results are supported by continued strong growth in earned premiums, as well as an ongoing trend of premium rate increases, said Fitch. However, the risk of a systemic cyber incident or several large cyber catastrophes over the near term cannot be discounted, as the frequency and severity of attacks are unlikely to subside, and companies continue to expand their digital footprints.
The research added that data compiled from cyber insurance supplemental filings in statutory financial statements revealed an acceleration in market premiums relative to already strong previous growth. A sharp increase in 2020
cyber loss ratios promoted substantially higher prices and rapid premium growth in 2021 that exceeded incurred losses, leading to surprising improvement in the cyber direct loss ratios versus the previous year.
Fitch estimated that standalone and packaged cyber statutory direct written premiums increased by 74% in 2021 to nearly $5bn compared with 9% growth for the P&C industry overall, driven by heightened policyholder risk awareness and greater demand for coverage. Standalone cyber coverage, which represents approximately two-thirds of industry premiums, increased by 92% in 2021. Standalone coverage will expand further as a proportion of industry cyber premiums as insurers strive to reduce exposure to ‘silent’ cyber risks and minimise any ambiguity in coverage terms. However, a large portion of cyber risk remains uninsured.
Cyber supplement data reveals that annual reported claims filings have doubled for the industry in the last three years. For standalone cyber coverage, direct incurred losses and defence and cost containment expenses expanded by over 300% since 2018. Still, in 2021 earned premium growth exceeded the change in incurred losses and the standalone cyber loss ratio improved to 65% from 72% a year earlier.
While a positive indication on market performance, direct loss ratios do not provide a full representation of segment underwriting profits as underwriting and adjusting expenses are excluded as well as effects on premiums and losses from ceded reinsurance. Besides strong growth in annual premiums, this loss ratio improvement is also likely tied to changes in carrier risk selection and tighter policy terms and conditions.
Considerable future claims uncertainty is offset by an anticipation for further strong premium growth as insurers continue to sharply raise cyber premium rates. The Council of Insurance Agents & Brokers’ Commercial Property/Casualty Market Survey indicates that average cyber renewal premium rates increased at an accelerating rate for the past two years, including a record 34% increase in 4Q2021. M