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Best's special report looks at trends in cyber coverages.

Best's Special Report (Excerpt): Cyber Line Expected to Be One of the Leading P/C Growth Areas (June 22, 2017)

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.

NAIC Supplement

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
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
Publication:Best's Review
Date:Aug 1, 2017
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