PwC: $7.5B cyber market by 2020; urges insurers to expand offerings

The cyber insurance market offers great potential that much of the insurance industry has not taken full advantage of, according to a new report from PricewaterhouseCoopers (PwC), which projects the market to increase to $7.5 billion in premiums by 2020.

“Businesses across all sectors are beginning to recognize the importance of cyber insurance in today’s increasingly complex and high risk digital landscape. In turn, many insurers and reinsurers are looking to take advantage of what they see as a rare opportunity to secure high margins in an otherwise soft market. Yet many others are still wary of cyber risk. How long can they remain on the sidelines? Cyber insurance could soon become a client expectation and insurers that are unwilling to embrace it risk losing out on other business opportunities if cyber products don’t form part of their offering,” stated PwC in its “Insurance 2020 and Beyond” report.

A select few insurers and reinsurers currently offer cyber insurance, a number that PwC says needs to grow, while acknowledging the challenges presented by the emerging risk. PwC called cyber crime “a costly, hard to detect and difficult to combat threat” and noted that the risk carries a “long and unpredictable tail” making reserving for losses difficult.

“From an insurance perspective, while analogies are often made with terrorism or catastrophe risks, cyber risk is, in many ways, a risk like no other,” PwC commented. Not to be discounted are the cyber risks faced by insurers themselves to their operations, as the report found that policyholders would be less likely to trust the insurance solutions offered by a less-than-cybersecure company.

And some insurers show a great deal of interest in growing in the cyber insurance space, since it represents a growing, profitable field in an otherwise soft market. PwC commented, “There is a strong appetite among underwriters for further expansion in cyber insurance writings, reflecting what would appear to be favorable prices in comparison to other areas of a generally soft market – the cost of cyber insurance relative to the limit purchased is typically three times the cost of cover for more established general liability risks. Part of the reason for the high prices is the still limited number of insurers offering such coverage, though a much bigger reason is the uncertainty around how much to put aside for potential losses.”

Those high costs could invite regulatory scrutiny and already appear to have some insurance buyers wondering about the real value of the policy, PwC added. While it is likely that the market will expand and pricing will shift, the report included concerns that innovators outside the insurance industry could undercut the developing market by coming up with firm solutions more quickly.

PwC offered several suggestions for improving the cyber insurance market in the short-term. The report includes recommendations for increased data sharing, increasing cyber expertise in-house, real-time policy updating to reflect the changing world of risk, more fully developing the reinsurance market, and basing underwriting on the mitigation measures taken by policyholders. In terms of pricing, PwC suggested that insurers look at how much they can “afford to lose.”

“Pricing will continue to be as much of an art as a science in the absence of robust actuarial data. But it may be possible to develop a much clearer picture of your total maximum loss and match this against your risk appetite and risk tolerances. This could be especially useful in helping your business judge what industries to focus on, when to curtail underwriting and where there may be room for further coverage,” concluded PwC.