The U.S. cyber insurance market experienced strong growth in 2022, with direct premiums increasing by 50% to reach $7.2 billion, according to a new report from rating agency AM Best.
The report, titled US Cyber: First Hard Market Cycle Brings a Return to Profitability, highlights the significant improvement in loss ratios due to increased underwriting discipline.
Over the past three years, direct premiums written (DPW) in the cyber insurance market have tripled, driven by high demand that outpaces the broader commercial lines industry. In 2022, insurers saw a remarkable improvement in calendar-year results following two challenging years. This improvement can be attributed to continued rate increases, tighter underwriting practices, and a decrease in ransomware attacks. Compared to 2021, the loss ratio on standalone policies dropped 23 percentage points to 43%, while on packaged policies, it decreased by 18 percentage points to 48%.
“Underwriters have used every item in the proverbial toolbox to manage exposures,” said Christopher Graham, senior industry analyst at AM Best. “In addition to the rate increases, underwriters have cut limits, increased insureds' own retention, and improved risk selection.”
Graham also said that as the cyber landscape expands and becomes more complex, with the emergence of new exposures due to artificial intelligence and the resurgence of ransomware attacks in 2023, the demand for cyber coverage is expected to rise.
The report reveals a shift in the cyber insurance market away from packaged policies, with standalone policies becoming the preferred choice among larger insureds. More than 70% of cyber premiums are now written on standalone policies, surpassing the total cyber insurance premium written in 2021. AM Best viewed this trend positively, as it may lead to a reduction in disputes and litigation costs.
Another notable change is that surplus lines writers now account for a majority of the cyber insurance premium. While they held a steady 25% share of the market from 2015 to 2020, their share has increased by over 500% since then, representing nearly 60% of the total cyber market premium.
Despite a decline in ransomware claims in 2022, first-party claims still make up around 75% of the reported claims, with an increase in business email compromise claims. Third-party liability claims also remain significant. Additionally, war risk exclusions vary among companies, with some maintaining traditional war exclusions while others accept certain war exposures.
“Systemic risk is an ongoing concern,” said Fred Eslami, associate director at AM Best. “Property catastrophes typically affect a limited geographic area, but a cyber catastrophe, as we saw with NotPetya, can go worldwide. As the definition of war becomes broader, so may the exclusion as well, which could lead to insureds with less coverage. Ultimately, the coverage provided to insureds may be decided by the risk appetite of the insurer, and to a certain extent, the coverage that reinsurers are willing to provide.”
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