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What are the key considerations for insurers seeking to take advantage of opportunities in cyber?
2016 WAS another year of large data breaches for both Australian business and government, with the most memorable being the distributed denial of service attack that shut down the nation’s census website. As the number of data breaches continues to grow year-on-year, so does the cyber risk insurance market.
There is tremendous opportunity for cyber risk insurance within the market today; it’s a line of business poised for significant growth. The nature of different risks within the market is still evolving (including factors such as the internet of things, for example), which means insurers will need to evolve their products quickly and respond to the market as it changes.
There are three key factors that insurers should consider to successfully take advantage of future growth within the cyber risk market:
Risk management
Leaders in the cyber risk market will be the insurers that provide an evolving risk management program that gives demonstrable value to the client. These insurers will benefit tremendously from the insight provided by their own risk management services to inform underwriting, adjust pricing and determine how to proactively respond to the market.
Risk management, how it’s implemented, the value it brings to clients, and how it interplays with coverage will weigh heavily in the marketplace. Successful insurers will be able to tailor and scale services to the size, scope and need of each market segment.
To make this successful and economical, insurers need to analyse and apply risk management options at the right level of activity and at the right time. Throughout the life cycle of the insured, insurers need to leverage the data available about the insured, including their cyber activities and maturity, to determine which risk management activities the insured should be self-administering and what can be offered/ sponsored by the insurer. Artificial intelligence can go a long way to helping insurers determine how risk management models should be applied during the insured’s life cycle.
Insurers that manage this well will have a leg up on the competition and will be on their way to creating a profitable book of business.
Actionable analytics
Cyber risk is similar to the growth and development of professional liability in the late 1970s and early ’80s. When professional liability took off, a lot of insurers jumped into the new, largely unknown market but were caught unaware as results developed horribly, horribly wrong. Insurers need actionable analytics (preferably with scenario-based planning) that help them monitor book and market performance to avoid making the same mistakes made by their professional liability predecessors.
An insurer can’t think of all of the permutations, but what they can do is monitor results. This includes market penetration, risk assumed, claims trends, incident reports and risk management findings. Leveraging all of this data, and providing actionable insight to management and underwriting in real time, will enable insurers to change their pricing, underwriting, claims process, products and go-to-market strategy before the portfolio turns unprofitable.
Flexible systems
Today, insurers’ ability to leverage the benefits of the first two points are tightly tied to how easy it is to update and change the underlying systems that support their business. Insurers need to be able to update rules, decisioning and processes to reflect an insurer’s emerging go-to-market strategy. Without this, insurers will be at risk of not being able to respond to the market quickly and effectively.
One thing that is clear is most insurance environments are not up to the task of providing a flexible environment that can be responsive to both the market and the need to support underwriters. Often, the response to the needs of product innovation is to buy a new policy administration system, which is generally a huge investment that never results in the return insurers expect and does not give underwriters the tools they need to be effective.
Instead, insurers should be looking at core underwriting solutions that can sit on top of existing policy administration solutions and bring together the risk management, analytics, information, workflow, rules and product information underwriters need to act.
Cyber risk is still a new market that is not yet fully defined. Investing in AI and underwriting systems that enable the points above will provide the most return for the dollar and help insurers write business profitably.
Tom King is the senior director and industry principal of insurance at Pegasystems. Tom has more than 25 years of experience in the insurance industry. [email protected] Twitter: @tomkingNJ
