Cyber Risk Gets Real, Demands New Approaches

With the cyber risk environment worsening significantly, a recent A.M. Best report says, “prospects for the U.S. cyber insurance market are grim.”

The recent proliferation of ransomware attacks leading to business interruption and other related hazards has caused cyber insurance – which began as a diversifying, secondary line – to become a primary component of a corporation’s risk management and insurance purchasing decisions.

Consequently, the A.M. Best report says, insurers urgently need to reassess all aspects of cyber risk, including their appetite, risk controls, modeling, stress testing, and pricing, to remain a viable long-term partner for dealing with cyber risk.

Cyber insurance “take-up” rates (the percentage of eligible customers opting to buy the coverage) are on the rise, according to a recent Government Accountability Office (GAO) report – to 47 percent in 2020 from 26 percent in 2016. This increased demand has been accompanied by higher prices for cyber insurance, as well as reduced coverage limits for some industry sectors, such as healthcare and education. In a recent survey of insurance brokers, the GAO says, more than half of respondents’ clients saw prices rise 10 to 30 percent in late 2020.

“The rate increases for cyber insurance outpaced that of the broader property/casualty industry, but the increase in cyber losses outstripped the rate hikes, which suggests more trouble for 2021 as ransom demands continue to grow,” said Sridhar Manyem, director, industry research and analytics at A.M. Best.

The A.M. Best report says the challenges the cyber insurance market faces include:

  • Rapid growth in exposure without adequate underwriting controls;
  • The growing sophistication of cyber criminals that have exploited malware and cyber vulnerabilities faster than companies that may have been late in protecting themselves; and
  • The far-reaching implications of the cascading effects of cyber risks and the lack of geographic or commercial boundaries.

In April, Federal Reserve Chairman Jerome Powell said cyberattacks are the foremost risk to the global financial system, even more so than the lending and liquidity risks that led to the 2008 financial crisis.  

“The world evolves, and the risks change as well and I would say that the risk that we keep our eyes on the most now is cyber risk,” Powell said. “There are scenarios in which a large financial institution would lose the ability to track the payments that it’s making, where you would have a part of the financial system come to a halt, and so we spend so much time, energy and money guarding against these things.” 

The Fed chief’s concerns have since been borne out by attacks on the Colonial PipelineJBS SA – the world’s largest meat producer – the New York City Metropolitan Transportation Authority, and others.

More recently, FBI Director Christopher Wray compared compared the current spate of cyberattacks with the challenge posed by the Sept. 11, 2001, terrorist attacks. He said the agency was investigating about 100 different types of ransomware, many tracing back to hackers in Russia.

As we’ve written elsewhere with respect to natural catastrophes, it seems the world has entered a phase in which the traditional emphasis on risk transfer through insurance products is no longer sufficient to address today’s complex, interconnected perils. A focus on resilience and pre-emptive mitigation is in order, and insurers are well positioned to serve not only as financial first responders but as partners in managing these evolving hazards.

Ms. Winnie Tsen, Assistant Director, Financial Markets and Community Investment, U.S. Government Accountability Office (GAO), was one of the key contributors to the GAO’s May 2021 report on cyber insurance.