Hidden cyber risk in US could lead to $12.5bn losses, warns report

Cyber exposures accumulating in the US property insurance market could result in $12.5 billion non-physical damage losses and could cause certain carriers’ capital adequacy ratios to deteriorate, a new report by  CyberCube,  AM Best and  Aon has warned.

According to a new study, “Spotlight on Cyber: A study of aggregation risk in the US property insurance market”, sufficient cyber risk is accumulating in the US property market to trigger a one-in-100-year loss of $12.5 billion. It noted that a loss of this magnitude would be enough to cause a downward transition of the Best’s Capital Adequacy Ratio (BCAR) for 18 US property carriers.

The analysis revealed that of the 579 property insurers analysed, 12 carriers fell one level in the BCAR, four dropped two levels, and two insurers each fell three levels and four levels respectively. While the BCAR assessments are not the sole determinant of a company’s financial strength rating, a significant deterioration in it may lead to a downgrade of an insurer’s FSR.

The report concluded that, while current levels of cyber exposure within US commercial property are manageable by the property industry as a whole, the exposure could have ratings impacts for a section of the property market.

The large growth in cyber exposures anticipated over the next few years will challenge the industry’s ability to cope with rapidly increasing risks, it warned.

The research noted that a mix of regulatory pressure and good portfolio management practice is driving carriers to explicitly exclude (or affirm) cyber coverage from non-standalone policies, where “silent” cyber exposure may exist. However, it is becoming apparent that insurance carriers, while starting to offer explicit cyber coverage in US commercial property policies, may not typically be underwriting or pricing the risk accordingly. The report warns that cyber exposures in the US property market may be unaccounted for in carriers’ enterprise risk management strategies.

CyberCube, AM Best and Aon stated that the report aims to quantify the cyber exposures accumulating in the US property market and calls for further clarification of cyber cover in commercial property policies, explicit underwriting and adequate pricing of the risks associated with cyber events in property policies.

Rebecca Bole (pictured), CyberCube’s head of industry engagement, said: “ CyberCube’s modeled loss figure of $12.5bn suggests that the US property market is exposed to $9.5bn of attritional losses and $3bn of catastrophic losses in the return period. It is apparent that the property market is already paying attritional losses for non-affirmative cyber coverage.”

Sridhar Manyem, AM Best’s director of industry research, said: “While losses of $12.5bn are relatively low when placed in the context of natural catastrophes, considering these exposures are often unpriced or unaccounted for in enterprise risk management, the impact on carriers can be significant and more importantly, unexpected.”

Jon Laux, Aon’s head of cyber analytics, added: “As this research shows, quantification of the aggregation potential from cyber-related losses in property policies is very real. With property insurers affirming elements of cyber cover in their policies, insurers are exposed to significant losses, which are not necessarily priced accordingly. Through better information, industry participants will be able to make better decisions about placing cyber risk.”

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