Cyber stress test reveals potential insured losses

A modeled single-event cyber catastrophe would generate “meaningful to significant” gross losses for three of the top 20 cyber insurance providers, ranging from 15 percent to 119 percent of these companies’ estimated 2022 policyholder surplus under a stress-test scenario, according to AM Best.

The agency used a cloud service provider interruption and mass vulnerability scenario to test the top 20 carriers’ cyber portfolios and model their gross loss potential.

In the first scenario, numerous cloud-based customer servers fail, leading to widespread service and business interruptions. In the second scenario, a common software application is compromised and exploited on a global scale. In addition to the two event scenarios, an assessment against both events occurring over a 12-month period found that at the 1-in-200 event level, five companies incurred gross losses ranging from 11 percent to 233 percent of their estimated 2022 policyholder surplus.

The report titled “Cyber Insurance Market: Stress Testing the Future” notes that gross losses under the 1-in-50 and 1-in-200 scenarios do not take into consideration ceded reinsurance arrangements to which these companies may be party. However, the analysis also does not take into consideration companies’ silent cyber exposure (i.e., when perils are neither specifically included nor excluded), which potentially could be significant.

“For the majority of these companies, even the gross losses do not come close to the natural catastrophe probable maximum loss estimates used for stressing the balance sheet strength of the companies,” said Fred Eslami, an associate director at AM Best. “However, under these circumstances, a handful of companies could lose a significant amount of surplus, which potentially could create ratings pressure or even trigger a downgrade,” Eslami warned.

Sridhar Manyem, director of industry research and analytics, added: ”Cyber risk inherently will span multiple functional skill domains, requiring expertise from claims, underwriting, actuarial and enterprise risk management, and making the process truly a team effort across an insurer. Addressing the talent gap will be a critical aspect of risk management.”

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