What Challenges do Cyber Insurance Providers Face in a Fluctuating Market?

Nearly every week, a cybercrime makes national headlines. As you have likely witnessed at your agency, these crimes have driven cyber liability insurance take-up rates dramatically in the last four years. Congress also noted the increased demand and directed the U.S. Government Accountability Office to study cyber insurance issues. Released in May 2021, the GAO’s report makes for sobering reading. As an insurance professional, the study’s three main findings are worth knowing.

Limited Loss History Hampers Insurers

According to the GAO report, the greatest challenge for insurers in developing cyber insurance products is the rapid evolution of cybercrime. Loss history is the cornerstone for actuaries. With cybercrime, as soon as actuaries gain a handle one risk, cybercrooks pioneer new methods. A prime example is ransomware predators escalating from erasure ultimatums to threats of data disclosure. To build better data for actuaries, some industry professionals seek cooperation with the U.S. Department of Homeland Security. The report highlights a proposal for a cybercrime data depository comprised of contributions from victims and insurers.

Inconsistent Policy Definitions Drive Disputes

Decades-old established terms of reference benefit both the insurers and insured with property and casualty insurance. With cyber liability coverage, however, the GAO’s review points to an alarming lack of consensus. The office notes that – at present – insurers do not even agree on what actions constitute a cyberattack. These ambiguities serve as an open invitation to expensive litigation. The Council of Insurance Agents and Brokers has called attention to this issue, but the report notes little progress toward a worldwide consensus.

Aggregated Loss Risk Restrains Coverage Growth

While the number of insurers offering cyber coverage has increased by one-third, the report notes that sector concentration remains an issue. Using Standard & Poor’s data, the GAO states that 10 insurance groups account for 70% of annual cyber liability premiums. In comparison, the same 10 insurers booked just 18% of premiums from the entire P&C market. This concentration poses a threat for the dominant cyber liability players and the P&C insurance industry at large.

With cybercriminals growing in sophistication and building cooperative networks, the risk of a simultaneous attack on a vulnerable sector is growing. Such an attack would lead to a flood of claims and aggregated losses among insurers. National Association of Insurance Commissioners staff members interviewed by the GAO believe that such unchecked losses could eventually threaten the solvency of some cyber liability insurance providers. While industry insiders are optimistic that data analytics will lead to better loss modeling, aggregated loss risk is now restraining the expansion of cyber coverage.

These findings pound home the necessity of getting the fundamentals right with your cyber liability insurance clients. Stay on top of the latest cybersecurity risk management strategies, and strive to eliminate all coverage ambiguities before your client signs on the dotted line.

About Mavon Insurance

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