Cyber insurance: changing dynamics in a maturing market

Cyber insurance: changing dynamics in a maturing market

Skills and data are building up, leading to less favourable conditions for negligent buyers. Our recent review of the Cyber Insurance market place, in collaboration with Cyber Solace, highlights a number of key elements.

The market has changed considerably since our first analysis in 2016, driven by non-stop cyber-attacks affecting all firms – large and small – and in particular by the spectacular rise in ransomware-related incidents, from Wannacry and NotPetya in 2017 to more recent Maze and Sodinokibi outbreaks.

The introduction of tighter privacy regulations such as GDPR in 2018 or CCPA has also contributed to the development of risk awareness amongst buyers, around sub-standard cyber security practices where personal data is concerned.

Generally, most actors across the cyber insurance sector have built up skills over the past few years – something which was clearly deficient back in 2016. Data – which was clearly lacking back in 2016 – is also starting to accumulate in meaningful ways, as the Cyentia Institute and Advisen have comprehensively highlighted in their last Information Risk Insight Study.

This is allowing new dynamics to emerge between buyers, brokers, agents and insurers.

A market less and less favourable to negligent buyers
Many buyers – in particular amongst small firms – are still looking at cyber insurance as some form of “silver bullet”: A way of transferring cyber risk in full without having to change existing practices.

The market is becoming less and less favourable to those negligent buyers.

In the past, insurers might have paid back some of their claims by fear of killing the market. They are less and less driven to do so: As skills increase and data-driven models give deeper insights, buyers have to expect to be more and more challenged around their cyber robustness.

Cyber insurance, as we were foreseeing to some extent as far back as 2015, could be in the process of becoming an incentive mechanism driving adherence to security good practices in order to ensure pay-backs by insurers, in the face of cyber-attacks which have now become plainly a matter of “when”, not “if”.

The threat of “silent cyber”
However, over the past few years, driven by the skills imbalance within the market which we highlighted back in 2016, a number of legacy practices have created a potential storm around the cyber insurance market at large, which the current COVID-19 crisis can only aggravate.

Cyber insurance was rarely sold as a standalone policy. Many cyber insurance policies have been effectively “buried” within other policies, and their diversity in terms of language, coverage or exclusions remains staggering.

This “silent cyber” problem is turning into a nightmare for many insurers and re-insurers who are finding it increasingly impossible to estimate accurately the amount of cyber risk they actually carry, once again in the face of non-stop cyber-attacks, and now with the COVID-19 crisis aggravating the situation and also punching a multi-billion hole in their pockets through business interruptions payments.

The extent of this could be very significant and may end up creating a systemic risk event, over which the financial regulators would have to intervene.

Overall, even if it continues to be shaken by regulatory challenges or court cases (many high profile lawsuits are still unresolved), the cyber insurance market is emerging out of immaturity, insurers are effectively paying back, and cyber insurance is becoming a strong measure for CFOs and CEOs to consider in their arsenal of protective measures against cyber threats, as long as they remain otherwise committed to adherence to cyber security good practices.

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