The webinar, moderated by Yvette Essen, Head of Communications and Market Engagement for CyberCube, featured industry experts Jack Hammond (Aon Re), Josh Knapp (Chubb), and Jon Laux (CyberCube). T
he discussion centered on how the cyber insurance market, now viewed as a "capital intensive and catastrophe exposed line of business," and how it is growing and maturing, and what this means for capital management and underwriting.
he discussion centered on how the cyber insurance market, now viewed as a "capital intensive and catastrophe exposed line of business," and how it is growing and maturing, and what this means for capital management and underwriting.
Current State of the Market: Growth and Conditions
The panelists confirmed that the cyber insurance market is growing, but at a significantly slower rate than in previous years. Due to the current soft market conditions (characterized by reduced rates/declining premiums), ultimate growth projections have been revised downwards, potentially to 12% or less per year, down from previous estimates of about 20%.
- Growth Metrics: Global premium is projected to grow from $14 billion to approximately $14.6 billion between 2024 and 2025.
- Pricing Moderation: The commercial risks team at Aon noted a rate reduction in Q2, which was the "least negative" seen over the last three years, suggesting a potential moderation in the rating environment.
- Loss Experience: Despite losses seen this year (e.g., Scattered Spider losses affecting M&S and Co-Op), actual losses compared to expected losses (A vs. E) are currently within expectations for all years so far. However, frequency did pick up in 2023.
Market Risks and Systemic Concerns
A major focus was the evolving systemic risk and its impact on capacity and capital management.
- Systemic Exposure: Given events like the disruption to Change Healthcare or other cloud service providers, systemic cyber events and cascading effects have been demonstrated.
- Capital Intensity: As the largest cyber books grow (reaching $500 million plus, with leading carriers exceeding $1 billion), the accumulation level is becoming more material and consequential relative to the overall balance sheets of insurers. This growth leads to increased scrutiny from internal capital review committees, regulators, and rating agencies.
- Portfolio Concentration: The market faces concentration risk because it is still highly US concentrated (about two-thirds of the overall market). Furthermore, the underlying technology infrastructure, including the biggest cloud service providers, is also US-centric, which creates headwinds for global diversification.
Reinsurance and Maturation
The reinsurance market is characterized by an excess of capacity. This excess, combined with demand flattening off, is leading to a reduction in ceded shares.
Shift to CAT: There is a significant movement and innovation occurring in the event space (CAT), where clients are looking for protection against catastrophe losses.
Underwriting Maturity: This shift away from high proportional quota share (QS) treaties (which generally indicate a poor understanding of risk) toward non-proportional and CAT protection is viewed as a natural maturation of the cyber market. Cedants are becoming more comfortable managing their attritional losses.
Future Growth and Regional Expansion
Growth is challenging, and the experts highlighted the need to focus on underserved areas to boost penetration, which is currently low (around 1% globally).
- Target Regions: Growth is anticipated to come from regions outside North America, particularly Europe, APAC, and Latam, and within the micro and SME spaces.
- Growth Drivers: International growth can be driven by the search for portfolio diversification from a systemic risk perspective. Also, major regional losses (like the SK Telecom loss in South Korea) can trigger increased demand in those territories.
- Hurdles: Challenges to international growth include volatile pricing swings previously seen in the hard market (2019–2022), complexity, and insureds not yet seeing the full value of the product.
Underwriting, Data, and Diversification
The conversation emphasized the need for better data and advanced modeling to handle aggregation and risk management.
- Modeling and SPOF: CyberCube's Portfolio Manager Version 6 (PMV6) update focused on identifying diversification levers. The research found that diversification via Single Point of Failure (SPOF) technologies (e.g., distributing risk across multiple cloud service providers) is the single most important lever, potentially reducing capital intensity by almost 40%.
- Other Levers: Diversification can also be achieved by focusing on industry (with close to a 30% benefit). Geography and company size (revenue) provide less impact, falling in the low-to-mid teens range.
- Data Quality: Growing the market internationally requires more data from insureds, vendors, and cyber events. Data quality and integrity are vitally important for improving the understanding of systemic risk and continued growth.
Product Innovation and Mitigation
Panelists noted that this soft market cycle has seen less net new innovation in coverage compared to the last cycle, though there is potential for innovation around affirmative AI covers.
- Mitigation Effectiveness: Insurers have been successful in reducing the frequency and severity of events through mitigation efforts.
- Catastrophe Mitigation: Research shows that key risk quality factors that mitigate against catastrophe events include: patch management, network segmentation, and data backups. Organizations moving toward a well-mitigated posture could see tail losses reduced by about 60%.
Future Actions: Experts advised the market to focus on three key actions:
1. Grow portfolios in underserved territories, industries, and market sectors to gain diversification benefits and grow the common pool.
2. Understand catastrophe risk and what drives systemic loss.
3. Improve data awareness and aggregation (particularly vendor tracking), as better data quality allows models to reduce the inherent risk premium due to uncertainty. Brokers also need to function as better salespeople to "turn non-buyers into buyers"
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