What’s unfolding in the global cyber insurance market?

In S&P Global Ratings’ recent briefing on the state of the global reinsurance sector in 2023, notable developments were highlighted, indicating that the sector is stabilizing with signs of improvement in underwriting. As part of much-needed structural changes in reinsurance underwriting, S&P has upgraded its outlook on the global reinsurance sector from negative to positive, anticipating that it will achieve its cost of capital in 2023-2024.

During the media briefing, experts in ratings shared insights into the current state of the reinsurance sector, touching on various aspects, including operational performance, natural catastrophe trends, life reinsurance earnings, and the dynamics in the cyber reinsurance market. Simon Ashworth, Chief Analytical Officer – Insurance Ratings at S&P, shed light on how the credit rating agency assesses broader industry trends and their implications for individual insurers and reinsurers.

In pursuit of this assessment, S&P conducted a comprehensive survey of global reinsurers and multi-line insurers in the quest for substantial quantitative data concerning the profitability and exposure levels of the cyber insurance market. This research yielded a wealth of detailed information on cyber exposures, which is particularly valuable given that cyber insurance, as a relatively new line of business, has historically lacked transparency in terms of public reporting.

Ashworth noted that the research publication detailed a thorough study of cyber insurance profitability, revealing that primary insurers had returned to healthy combined ratios, reminiscent of pre-pandemic levels. However, reinsurers faced profitability challenges in the cyber insurance segment over the past year or two. Consequently, S&P anticipates reinsurers will begin to increase their rates for cyber insurance.

He emphasized the pivotal role of reinsurers in shaping the broader cyber insurance market and observed that, based on their sample, cyber insurance currently represents an unprofitable underwriting perspective for reinsurers. Consequently, the prospect of rate hikes in the realm of cyber reinsurance is one to watch closely.

Explaining why reinsurers are reevaluating their strategic positions in the cyber market, Ashworth pointed out that the sector is only marginally unprofitable from an underwriting standpoint, with a combined ratio of 101%. While primary insurers succeeded in securing rate increases in 2022, the reinsurance market saw an influx of new players.

S&P’s research indicated that annual premiums in the cyber insurance market reached approximately $12 billion in 2022 and are projected to grow at a rate of 25% to 30% annually, reaching about $23 billion by 2025. This raises the question of whether there is a strategic advantage for cyber reinsurers in refraining from raising rates. However, reinsurers are unlikely to accept the cyber segment’s unprofitability compared to historical levels, especially when, as recently as 2020, reinsurers were operating at a combined ratio of 80%.

The current market dynamics represent an inversion of recent years, where primary insurers faced losses during the pandemic while reinsurers enjoyed favorable conditions. Now, the situation has reversed, with primary insurers experiencing positive momentum. The market remains in its infancy, with participants seeking their footing and strategy amidst constant new entrants.

The key question now is how the primary cyber insurers will respond when cyber reinsurers increase their rates. Will primary insurers pass these costs on to policyholders? S&P’s forward-looking projection suggests that insurers are unlikely to do so, as they aim to avoid reinforcing the perception that cyber insurance is prohibitively expensive for insureds. Currently, cyber insurance is quite profitable on the primary side, and insurers recognize that squeezing policyholders too much could deter them from purchasing coverage or opting for self-insurance. Therefore, insurers may absorb the P&L impact rather than risk limiting demand and adoption of the product, hindering the market’s sustainable growth.

In conclusion, the cyber insurance market is undergoing significant changes with potential rate increases in the cyber reinsurance sector. However, primary insurers may absorb these costs to ensure the continued growth and accessibility of cyber insurance, making it a promising market both in terms of profitability and fundamental growth.