More Writers Move to Standalone Policies: A.M. Best Special Report
Oldwick, NJ (June 26, 2017) – Top cyber insurance writers have shifted away from writing packaged policies to standalone coverage by nearly a 70-30 split on the $1.3 billion of direct premiums written in 2016, according to a new A.M. Best special report.
The Best’s Special Report, “Cyber Line Expected to Be One of the Leading P/C Growth Areas,” states that this shift mainly results from many insurance companies realizing that tailored coverage forms addressing cyber liability risks separate from traditional insurance products, such as commercial general liability, business interruption or directors and officers policies, were more efficient and effective. Additionally, due to the general language of packaged polices, insurance companies have faced expensive litigation in cases where such policies did not include exclusory language.
The information discussed in this report is based on the Cybersecurity and Identity Theft Insurance Coverage Supplement, which was initially introduced by the National Association of Insurance Commissioners (NAIC) for year-end 2015. This information is limited to those companies required to file the supplement and does not include data for foreign insurance companies.
Overall, cyber insurance for the majority of this universe of companies was profitable, and the direct loss ratio decreased by 4.5 percentage points to 46.9% in 2016 from 51.4% in 2015. The decline in direct loss ratio for 2016 is partially attributed to the majority of reported cyber-attacks being related to ransomware heists. In almost all ransomware cases, the losses were well below the deductible and a simple backup recovery resolved and remedied any negative long-term effect of the attacks.
Focusing on the top 20 cyber insurance writers, representing a 87% market share in 2016, standalone cyber policy paid losses relative to direct premiums earned (DPE) increased to 24.3% from 19.5% in 2015. Paid losses relative to DPE for packaged coverages increased to 21.8% in 2016 from 15.7% in 2015. This increase in paid losses for packaged coverages was driven by defense and litigation costs.
The report notes that cyber line of business has been predicted to become one of the leading growth areas within the U.S. property/casualty industry, and coverages have been estimated to increase up to $20.0 billion by 2020. Direct premiums written rose 34.7% year-over-year in 2016, but A.M. Best thinks it is too early to determine if the growth projections will come to fruition. While many signs point to very substantial growth in the cyber line of business, it remains to be seen whether increased demand will be sustained beyond the typical bump that occurs after every noteworthy breach.
That said, A.M. Best believes a transition to standalone cyber policies may contribute to better pricing and reserving methods, which ultimately may lead to refinements in modeling tools and contribute to more accurate understanding of risk aggregation.
To access the full copy of this special report, please click here.
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SOURCE: A.M. Best