Cyber reinsurance market braces for sustained rate increases: S&P Global Ratings
The cyber reinsurance market is expected to remain hard, bucking the current soft market trend in the primary market, S&P Global Ratings has predicted.
Despite the influx of capacity and competition within the primary market, the reinsurance sector has faced significant challenges, noted Manuel Adam, Associate Director at S&P Global Ratings. Low profitability and underwriting losses have plagued reinsurance portfolios, prompting the need for higher rate adjustments.
Adam believes that the cyber reinsurance market is expected to see long-term rate increases as it adapts to the evolving cyber threat landscape. The sustained demand for reinsurance capacity and the need to ensure underwriting profitability will drive these rate adjustments.
The global cyber insurance market is currently valued at approximately $15bn, and S&P expects it to hit $20bn in premium volume by 2025.
The reinsurance market plays a critical role in the development of a sustainable and effective cyber insurance industry. Primary insurers cede about 50 to 65% of cyber insurance premiums to reinsurers, depending on the region. This reinsurance capacity is vital for supporting further market growth and providing the necessary capital.
The cyber insurance market witnessed a period of hardening rates from the second quarter of 2020 until around the second quarter of 2023, largely driven by the Covid-19 pandemic.
The pandemic accelerated digital transformation across organizations, creating more gateways for cybercriminals and increasing the frequency and severity of cyber claims, particularly those involving ransomware attacks.
In response, insurers reduced exposure, increased rates materially, and tightened policy wording, which helped improve profitability. However, the dynamic threat landscape, especially the impact of artificial intelligence (AI) on cyber risks, suggests that price fluctuations are likely to remain an ongoing characteristic of the cyber insurance market.
The Role of AI in Cyber Risks
Adam highlighted the significant impact AI is expected to have on the frequency and sophistication of cyber attacks. AI-driven automation in hacking methods will lead to more personalized approaches, such as tailored phishing and email extortion. These techniques, efficiently translated into multiple languages, allow for broader scaling across regions.
Ransomware-as-a-Service models are anticipated to expand further, fueled by AI advancements. This makes the cyber insurance market increasingly economically attractive to cybercriminals. The industry must adapt to the implications of AI on claims development and loss ratios to maintain stability.
To address these challenges, the cyber insurance industry must prioritize robust risk differentiation, underwriting practices, and the provision of assistance services such as prevention measures, risk management, and data recovery, Adam said. As the market continues to grow, the reinsurance sector's ability to support primary insurers with adequate capital and capacity will be crucial.
