The US cyber insurance marketplace has reached an interesting crossroad. The market is hardening, rate momentum is picking up, and underwriters are starting to be far more stringent in risk selection with the aim of portfolio optimization and maximizing their return on capital. In this evolving environment, which has been complicated by the COVID-19 pandemic, the US cyber insurance marketplace is still enjoying significant growth. Even with the economic devastation brought about by the coronavirus pandemic, there are more new buyers of cyber insurance than ever before, and existing policyholders are increasingly looking to buy more limit.
Rate momentum in the cyber insurance marketplace has been driven by a trifecta of issues, according to Eric Seyfried (pictured above), Head of Cyber US Open Market at AXIS Insurance. First and foremost, the frequency and severity of claims continues to rise, especially in the ransomware space. Cyber insurers have started to look at how those claim trends impact their books, and they’re adjusting their pricing accordingly. At the same time, the US is working through a near-zero interest rate environment and the cost of capital is increasing, forcing insurers to be more calculated in their risk selection and pricing.
“Such changes in the macro environment lead to a hardening market with (re)insurers exiting unprofitable classes leading to reductions in available capacity and increased costs of reinsurance and capital provisions,” said Jo Chadha (pictured below), Deputy Head and Chief Underwriting Officer of Cyber & Technology at AXIS. “The market is not only reliant on reinsurers and capital markets, but the regulatory environment also has significant impact on how insurance products are designed and sold. While the market was already hardening in certain sectors in the last two years, the pandemic has not only accelerated this hardening but the greater reliance on technology has also affected the cyber markets.”
According to Chadha, a hard market is “the best time to be an underwriter”. It gives underwriters the ability to do what they do best: be specialist experts on assessing risks and understanding the factors that affect a particular risk. It’s also a time to ask questions, to develop expertise, and, perhaps most importantly, build and cultivate long-term strategic relationships with both insurance brokers and end-clients. She added, “AXIS has invested heavily in our Underwriting, Claims, Product Development, Training & Advisory and Cyber Center of Excellence teams to not only build our own expertise on cyber risks but offer holistic service propositions to our brokers and clients. Our goal has always been to ‘underwrite through understanding’ and add value through expertise.”
While a hard market is generally an interesting time for underwriters, it comes with challenges for brokers and insureds. “It will be interesting to see how this macro dynamic plays out,” commented Seyfried, who worked as a broker before joining AXIS. “Initially, some brokers may want to fight the hard market evolution on behalf of their clients for better pricing, and that is a natural first reaction to a degree. But we’ve seen the more sophisticated brokers instead look to identify sustainable markets and sustainable partners, while also educating their clients about the market and the risks, while acknowledging their advocacy roles and their fiduciary responsibilities to their clients.”
The education and advisory role of the broker will only become more important as the business world continues its digitalization journey, which has been accelerated by the COVID-19 pandemic. The new way of working, which favors remote capabilities over office-based work, will create more cyber risk for companies that previously may not have considered cyber insurance as a must-buy. At the same time, the threat landscape is evolving, and cyber criminals have expanded their target range. It’s no longer only the large data-centric industries like healthcare, financial institutions and the public sector that must worry; these days, every business that uses technology and has a digital footprint is vulnerable in some way.
“As the threat environment increases and we continue to see an uptick in claims, I think the partnership between insureds and the insurer is going to get closer and closer,” said James Creasy (pictured above), Head of Cyber & Technology, London, at AXIS. “Therefore, it’s critically important moving forward that we continue to offer more than just an insurance product. The pre-breach and post-breach services that we provide, both in house and through external partners, are very much part of the future state of the cyber insurance market, and they’re key to the retention and stickiness in our relationship with our brokers and their clients.”
That stickiness, brought about by exemplary customer service, is key for insurers in a hard market. Seyfried stressed: “I think cyber’s current market cycle could last longer than the last one we saw. It’s not just the environment specific to cyber, but when you look at the global political and economic environment, as well as the evolving threat landscape, I think we’re looking at a cycle that is going to remain firm for a while across various industry sectors. Between access to capital, increased frequency and severity of losses, and evolving threat vectors, I think it’s going to be an interesting time to work in cyber insurance.”