Are Cyberrisk Insurers This Decade’s Mortgage-Securities Investors?

An awkward moment during  Advisen’s Cyber Risk Insights 2019 conference last week:

Are cyber insurers falling down on the job, as many say lenders, regulators, and rating agencies did before the 2008 financial crisis?

Panelists recalled how, in the early days of cyber, insurers often sought more information to write policies than clients could (or wanted to) provide. So, they started asking for less.

Most attendees remembered the “old days.” Many nodded. They understood.

The awkwardness came when one audience member observed that insurers “still chase market share” despite lacking complete policyholder risk information. “That sounds a lot like mortgage-backed securities before the financial crisis!”

Are cyber insurers falling down on the job, as many say lenders, regulators, rating agencies, and investors did before the 2008 financial crisis and subsequent recession?

The analogy may sound fair, but it falls apart on examination.

Mortgages and the financial crisis

In the early 2000s, it was easy to get a mortgage. Lenders would bundle loans to be sold as mortgage-backed securities. The theory: Few people would stop making payments and risk losing their homes. The rest would pay, and the security would deliver a fair return.

This made sense when lenders did their job. But too many abandoned their standards. Because they could sell them, lenders had no stake in whether the mortgages were paid.

Regulators and rating agencies, it has been argued, didn’t ask enough questions about the securities the loans supported. This gave investors more confidence than the investments warranted. When loans that should never have been made in the first place defaulted, the resulting dislocation of the homebuying and financial markets ushered in the Great Recession.

Where the analogy breaks down

Cyber insurers understand the risks they’re taking and price their policies accordingly. In fact, a recent I.I.I./J.D. Power survey found two of the top four reasons small companies choose not to buy cyber coverage are that it costs too much and contains too many exclusions.

Unlike the lenders and borrowers and investment banks in the early oughts, insurers have skin in the game. If they write bad business, they can’t simply pass it along to some naïve investor.

They also have a stake in customer relationships. They aren’t pushing policies, pricing them to sell, and hoping for the best. They’re working with clients to understand and address the clients’ vulnerabilities.

Cyber insurers understand the risks they’re taking and price their policies accordingly…. They also have a stake in customer relationships.

Seventy percent of small companies that bought cyber said their insurer helps with risk mitigation (up from 65 percent last year), according to the I.I.I./J.D. Power survey.  At the Advisen event, I heard insurers and policyholders discussing how they can address these perils. Policyholders clearly wanted insurers to do more than write policies and pay claims, and the insurers were listening.

Conversations like these, and the spirit of transparency and shared responsibility they reflect and promote, are essential to staving off and mitigating the impact of cyberattacks. Insurers and insureds, together, are visibly seeking solutions to a real and growing problem.

The people behind the financial crisis quietly created problems in pursuit of opportunities, studiously unmindful of the collateral damage they were generating.