Library: Deloitte – Overcoming challenges to cyber insurance growth

September 2020 featured report:

Cyber insurance has been held up as an area of innovation and major growth, but the reality hasn’t lived up to the hype, says Overcoming challenges to cyber insurance growth, a recent report from Deloitte.

Cyber shows promise, but insurers must adapt their offerings

Do be afraid of the dark

There’s no shortage of risk. The Hiscox report in last month’s Library showed that the number of companies that experienced one or more events in 2019 had increased by a third, rising from 45% to 61% of those surveyed.

Perhaps more worrying was that the number of attacks on smaller companies had soared from 36% to 63%.

Though the overall number of attacks was down, the cost of a breach is increasing, having quadrupled to US$184,000 among these smaller firms.

Premiums from standard policies have increased, but there isn’t much growth in standalone policies. In fact, the Hiscox report showed that 59% have no cyber insurance at all. And while 30% are considering it, more than a quarter (26%) have no intention of buying it.

What’s the problem?

Fear, galvanised by hindsight seems to be the greatest motivator, as those who tend to have experienced cyber breach and don’t wish to get caught without any cover again.

The main reasons for not buying it is cost (41%), coverage limits (34%), a poor experience of standalone cover in the past (33%), restrictive terms (33%) or a lack of clarity in coverage terms and conditions (23%).

A handful didn’t know that cyber was available as a standalone policy (17%), 27% prefer an alternative or to self insure, while 43% feel they are adequately covered elsewhere.

Those middle market businesses that do buy cyber cover – and that market is growing steadily – are offered it by their broker in two thirds of cases. This is not the case with those who do not buy as it rarely comes up in conversation unless the client makes the first move.

So there appears to be a problem to be addressed with distribution, which may be tackled with better communication and education. And It is a market worth fighting for, says Deloitte.

New entrants and DIY cyber coverage

There is much for insurers to learn from this middle market, and they need to do it quickly.

Though some are restricting coverage, or even removing it from standard policies, the growth potential remains strong.

Prices, limits and coverage terms all offer an opportunity to offer a different product. This might be backed by new ways of marketing their offering.

Cyber, just like all other areas of insurance faces an increasing threat from alternative, non-traditional sources – all of which have considerable distribution and are looking to diversify into financial services.

Not everyone is looking to partner with an insurer. Some will set aside a dedicated cyber risk reserve fund (51%), look to form their own captive insurer (42%), or even securitise the risk through issuing cyber bonds on the capital markets (41%).

A number of InsurTechs have already entered the market and are looking to disrupt the incumbents.

As elsewhere, insurers needs to offer products that better suit the specific needs of their customers if they are going to be successful in the cyber risk arena.

The future if not bright, shows promise

The report says that while the cyber insurance market may jump from US$2 billion to US$20 billion in premiums over the next few years, there is plenty of scope for insurers to achieve far in excess the 8% to 12% experienced since 2018.

Inside a decade, cyber premiums could mirror the levels of D&O, which itself was driven by a need to mitigate the risk of class actions.

In the US alone, says Deloitte, direct written US premiums for D&O were US$6.6 billion in 2018, or triple the level of current cyber premiums.

It may seem a hard road at the moment, but there is a clear need, though demand has yet to show it has transformed from being a luxury into a necessity.

For more, see the full report.

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