The cyber insurance market in the US experienced significant growth in 2022, with direct premiums rising by 50% to $7.2 billion and improved loss ratios due to enhanced underwriting discipline, according to a recent report by AM Best.
The report, titled “US Cyber: First Hard Market Cycle Brings a Return to Profitability,” highlights a tripling of direct premiums written (DPW) over the past three years, driven by a surge in demand that has outpaced the broader commercial lines industry by a considerable margin. In 2022, insurers witnessed a remarkable improvement in calendar-year results, following two challenging years, thanks to continued rate increases, stricter underwriting practices, and a decrease in ransomware attacks. Compared to 2021, the loss ratio dropped by 23 percentage points to 43% on standalone policies, and by 18 percentage points to 48% on packaged policies.
Underwriters have successfully managed their risk exposures
“Underwriters have employed various strategies to manage their exposures. In addition to raising rates, they have reduced coverage limits, increased insureds’ own retention, and enhanced risk selection,” stated Christopher Graham, Senior Industry Analyst, Industry Research and Analytics at AM Best. “As the cyber landscape expands and grows more complex, with artificial intelligence creating new vulnerabilities and ransomware attacks resurging in 2023, the demand for cyber coverage will only continue to rise.”
The report also reveals a shift in the cyber insurance market away from packaged policies, with standalone policies now being the preferred choice for larger insureds. Standalone policies accounted for over 70% of the cyber premiums written, surpassing the total cyber insurance premiums for 2021. AM Best considers this trend favorable for the industry, as it may reduce disputes and litigation costs.
Another noteworthy market shift highlighted in the report is the increasing dominance of surplus lines writers in the cyber insurance segment. Surplus lines insurers now account for a majority share of cyber insurance premiums, a significant change from the period between 2015, when the National Association of Insurance Commissioners (NAIC) began collecting data on cyber insurance, and the hard market of 2020. Since then, cyber premiums written by surplus lines insurers have surged by over 500%, currently representing close to 60% of the total cyber market premium.
Cyber catastrophes have a global risk
Despite the decline in ransomware claims during 2022, first-party claims still account for nearly 75% of the nearly 27,000 reported claims, primarily driven by an increase in business email compromise claims. Third-party liability claims also remain substantial, with some claims still in the development stage. Additionally, the report highlights variations in war risk exclusions among different companies, with some insurers maintaining traditional war exclusions while others accept specific war-related exposures.
“Systemic risk remains a persistent concern. While property catastrophes usually affect limited geographic areas, a cyber catastrophe, as demonstrated by the NotPetya incident, can have a worldwide impact,” explained Fred Eslami, Associate Director at AM Best.
He added: “As the definition of war broadens, so may the exclusion clauses, potentially resulting in reduced coverage for insureds. Ultimately, the coverage offered to insureds may depend on the risk appetite of insurers and, to some extent, the willingness of reinsurers to provide coverage.”
Source: AM Best
