Despite significant rate increases and a 75% boost in cyber insurance premiums in 2021, the industry loss ratio declined by only 10%, according to a recent AM Best analysis that predicted the hard market is “here to stay.”
“Cybercrime generated significant headlines throughout 2021,” said Christopher Graham, senior industry analyst, AM Best. “These attacks underscore the urgency of addressing cyber threats, which require brokers, underwriters, managing general agents and customers to work together, along with some legislative and regulatory involvement. The rising frequency and severity of ransomware attacks suggest that insurers need to be more proactive.”
The cyber market saw a 16% increase in claims for 2021, but insurers’ underwriting performance in the line improved, according to Best’s report. The ratings firm cited an overall combined ratio of 91.8% for last year, while the standalone cyber market posted a 98.8% combined ratio.
“In light of the high combined ratio, further rate increases in the segment are likely, though we expect the size of the rate increases to moderate,” Best said. Individual insurer combine ratios varied significantly, ranging from 35.9% to 154.2%. The top five insurers by premium – Chubb, Fairfax Financial, AXA XL, Tokio Marine, and AIG – had a combined ratio of 102%.
Standalone cyber premiums increased by 95% in 2021, eclipsing the combined standalone and packaged premium totals for 2020. However, while standalone cyber policies still comprise a small share of the overall policy count, they generate more claims, Best noted.
“The number of claims on standalone first-party policies has grown by an average of 38% over the past five years, compounded by worsening severity as well as the growing sophistication of ransomware criminals—owing to their awareness of victims’ financial wherewithal to optimize their ransomware demands,” said Best in its report. That said, data showed a decline in claims frequency by policy count for standalone market, while the packaged claims frequency rose slightly.
Best predicted that harder cyber market conditions would drive more buyers to consider captive insurers. This could offer sophisticated organizations flexibility, but reliable data on cyber captives is limited, the firm noted, and captives need to understand the complexities around the risk.
“In other words, simply a hard commercial market should not be the main reason to transfer the cyber exposure to the captives,” Best concluded.