US cyber insurance market will be tested by COVID-19 fallout: Fitch

Growing demand for cyber insurance coverage and rate increases fueled strong premium growth in 2019. However, loss ratios are likely to increase from current levels as cyber risks continue to evolve and insured exposures expand, according to James Auden of Fitch Ratings.

Cyber insurance direct written premiums grew by 12 percent in 2019 to over $2.2 billion, versus 8 percent growth in 2018, with $1.3 billion in cyber stand-alone direct premiums written in 2019, up nearly 14 percent from the prior year. Industry aggregate cyber direct written premiums for package coverage moved up slightly in 2019 to approximately $900 million.

Demand for cyber coverage also increased in 2019, according to the report. Global broker Marsh reported that 42 percent of US-based clients purchased cyber coverage in 2019, up from 38 percent in 2018. However, Fitch noted that US cyber market premiums continued to be concentrated within large global insurers, with Chubb, AXA-XL and American International Group (AIG) holding combined market share of approximately 36 percent at year-end 2019.

Fitch believes the economic fallout caused by the COVID-19 pandemic will likely test these recent premium revenue trends and claims experience. It expects the 2020 segment premium growth to be tempered by reductions in underwriting exposures and cyber coverage purchase practices to change in the near term with mounting strain on corporate budgets and profits.

Moreover, the shift to remote working environment is putting a strain on companies’ information security efforts that could lead to more cyber incidents in the near term, it said. A large unforeseen cyber event, such as a massive cloud intrusion or attack on infrastructure, could result in substantial individual incurred losses that could pressure capital levels and individual ratings.

Fitch believes that cyber underwriting performance will deteriorate as underwriting exposure grows, coverage broadens and the nature of cyber claims evolves.

"Newer market entrants face challenges in meeting performance of longer term players due to limited historical pricing and claims information. The industry statutory direct loss ratio for stand-alone cyber insurance rose significantly to 47% in 2019 from 34% in 2018. This figure is just below the 48% loss ratio reported in 2015, the highest industry figure reported in the brief history of cyber supplement reporting," Fitch reported.