Cyber may be the newest and fastest-growing sector in the insurance industry, but according to international ratings agency Fitch, growing cyber too aggressively can result in a credit negative outcome for insurers and reinsurers.
Around 50 insurers worldwide offer cyber insurance policies, and 2014’s US$2bn in premiums is expected to grow up to five times by 2020. However, Fitch said in a report that the lack of historical data and inadequate modelling of the exposures, as well as lack of understanding, can limit the adequacy in efficiency of solutions. Too many unknown factors make rapid growth risky.
“At this stage, Fitch would view aggressive growth in standalone cyber coverage, or movement to high portfolio concentration in cyber, as ratings negatives. Underwriting, pricing and reserving uncertainties currently outweigh the potential earnings growth benefits,” said James Auden, managing director at Fitch.
Insurers, reinsurers, and ILS market players should heed this warning, as having a ‘gold rush’ in cyber might lead to crippling surprises and overexposure. Modelling capabilities are likely to improve in the future, as new tools and research are being developed by professionals. Unfortunately, historical data can only be obtained from past attacks. So in order to learn more about the nature of cyber attacks, it might be necessary to observe how different cyber attacks work and the full extent of the losses they incur.
It is important that insurers exercise caution in growing their cyber products to avoid overexposure. Meanwhile, reinsurers should not be blinded by attractive cyber rates that may lead them to take on risks that are yet to be fully understood.