Best's special report looks at trends in cyber coverages.
With the increasing frequency and severity of cyberattacks during the past couple of years, insurers have become more aware of the risks and rewards of this line of business. Given the seriousness, scope, and scale of a number of attacks in 2016 and 2017, as well as the potential damage these attacks can cause, A.M. Best acknowledges the opportunities this coverage presents. However, due to the uncertainty of this risk, companies need to be prudent in their underwriting practices and exercise appropriate risk management and mitigation measures. A.M. Best's analysis is focused on an insurer's ability to aggregate, monitor, and manage its exposure under various scenarios. Data quality is a key factor when insurers provide information to regulators, other stakeholders, and their A.M. Best analytical team.
Industry observers have predicted that the cyber line of business will be one of the leading growth areas within the property and casualty space. Cyber coverages have been estimated to increase to $7.5 billion to $20.0 billion by 2020. Despite the growth in direct premiums of 34.7% from 2015 to 2016 reported by U.S. companies, it is too early to determine if these growth projections will come to fruition. After every reported breach, the demand for coverage increases but the overarching question is whether this demand will be sustained.
The information discussed in this report is based on the Cybersecurity and Identity Theft Insurance Coverage Supplement, which was initially introduced by the National Association of Insurance Commissioners (NAIC) for year-end 2015.
The Supplement is broken down based on coverage either on a stand-alone or a packaged basis. For the packaged policies, companies were required to either provide an amount that can be verified or provide an estimate for the packaged policies. This information is limited to those companies that file annual statutory financial statements with the NAIC, which totaled 140 insurance companies as of year-end 2016. As the Supplement was only introduced in 2015,A.M. Best notes that the data quality has certain limitations and that a number of companies may not have submitted accurate information for 2015 or 2016.
Shift to Stand-Alone Policies
Total direct premiums written (DPW) in 2016 was $1.3 billion, of which 67.9% were on a stand-alone basis, with the balance reported as packaged policies. The top 20 writers wrote $1.2 billion in DPW, of which 73.7% was on a stand-alone basis. This percentage increased for the top five writers, which reported 81.0% of the $699 million DPW on stand-alone policies. Comparing 2015 with 2016, DPW for both stand-alone and packaged policies increased by 34.7%.
Comparing 2016 data with 2015, one of the key takeaways is that the top cyber policy writers have shifted from packaged policies to stand-alone policies or have more accurately filled out the Supplement.
A.M. Best views this as a positive change since most claims have been covered under traditional insurance products such as Commercial General Liability Policies (CGLP), Business Interruption (BI), or Directors and Officers (D&0). The extension of implied coverages to these lines was not intended; without any exclusory language, however, some court rulings have sided with policyholders.
Due to the general language of these polices, and expensive litigation, many insurance companies realized that tailored coverage forms addressing cyber liability risks separate from CGLP/BI/D&O were more efficient and effective.
This transition to stand-alone cyber policies may contribute to better pricing and reserving methods, which may ultimately lead to refinements in modeling tools and contribute to more accurate understanding of risk aggregation.
Report exhibits show the DPW for the top 20 writers, separating stand-alone (see chart on next page) and packaged policies. In addition to the previously discussed advantage of stand-alone policies, A.M. Best expects a continued increase in the stand-alone type of coverage as compared with packaged, mainly due to anticipated cost and expense reductions in litigating disputed claims, as well as more specific and defined policy language focused on the prevalent type of attacks.
Focusing on the top 20 writers, stand-alone cyber policy paid losses, relative to direct premiums earned (DPE), increased from 19-5% in 2015 to 24.3% in 2016. Paid losses relative to DPE for packaged coverages increased from 15.7% in 2015 to 21.8% in 2016. This increase in paid losses for packaged coverages was driven by the defense and litigation costs that are inherent in such policies.
Overall, cyber insurance for the majority of this universe of companies was profitable and the direct loss ratio decreased by 9-6% from 51.4% in 2015 to 46.9% in 2016.
The decline in direct loss ratio for 2016 for the U.S. insurers, however, is partially attributed to the majority of reported cyberattacks being related to ransomware heists. In almost all ransomware cases, the losses were well below the deductible and a simple backup recovery resolved and remedied any negative long-term effect of the attacks.
Due to the intricacies of cyber coverage, it is expected the majority of future premiums will be offered by a limited number of companies, many of which are listed within the report's exhibits.
While many signs point to very substantial growth in the cyber line of business, it remains to be seen whether increased demand will be sustained beyond the typical bump that occurs after every noteworthy breach.
A.M. Best will continue to review new data reported in the NAIC Supplement and monitor growth trends in this developing line of business.
This Best's Special Report is available at www.ambest.com.
U.S. P/C Industry--Standalone Cybersecurity Direct Premiums Written Top 20 Ranked By 2016 Standalone DPW ($ Millions) 2016 Rank Standalone Cybersecurity * Company Name 1 1 American International Group 2 2 XL CatlinAmerica Group 3 5 Beazley Insurance Company, Inc. 4 4 Travelers Group 5 9 AXIS Insurance Group 6 3 Chubb INA Group 7 7 Liberty Mutual Insurance Companies 8 10 Allied World Assurance Group 9 8 BCS Insurance Company 10 11 Tokio Marine US PC Group 11 12 Zurich Financial Services NA Group 12 16 Markel Corporation Group 13 6 CNA Insurance Companies 14 17 Alleghany Insurance Holdings Group 15 13 Berkshire Hathaway Insurance Group 16 18 Starr International Group 17 20 Hiscox USA Group 18 19 Great American P & C Insurance Group 19 21 Aspen US Insurance Group 20 27 Swiss Reinsurance Group Top 5 * Top 10 * Top 20 * Total P/C Industry 2016 Standalone % of Market Total Company Name DPW Share (%) DPW American International Group 228.3 25.1 100.0 XL CatlinAmerica Group 160.7 17.6 100.0 Beazley Insurance Company, Inc. 75.7 8.3 90.3 Travelers Group 66.1 7.3 71.7 AXIS Insurance Group 37.0 4.1 73.5 Chubb INA Group 35.3 3.9 26.4 Liberty Mutual Insurance Companies 32.6 3.6 57.7 Allied World Assurance Group 32.4 3.6 99.6 BCS Insurance Company 32.2 3.5 58.1 Tokio Marine US PC Group 30.3 3.3 99.0 Zurich Financial Services NA Group 25.9 2.8 98.8 Markel Corporation Group 24.4 2.7 100.0 CNA Insurance Companies 23.8 2.6 34.7 Alleghany Insurance Holdings Group 11.8 1.3 75.9 Berkshire Hathaway Insurance Group 11.2 1.2 42.9 Starr International Group 10.2 1.1 78.7 Hiscox USA Group 9.4 1.0 85.1 Great American P & C Insurance Group 8.5 0.9 68.8 Aspen US Insurance Group 7.3 0.8 69.9 Swiss Reinsurance Group 5.6 0.6 100.0 Top 5 * 566.2 62.1 81.0 Top 10 * 724.1 79.5 75.3 Top 20 * 862.8 94.7 73.7 Total P/C Industry 911.4 100.0 67.9 * Ranked by 2016 total standalone and packaged cybersecurity direct premiums written Source: A.M. Best data and research
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|Title Annotation:||What A.M. Best Says|
|Date:||Aug 1, 2017|
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