October 9, 2020
By Erin Ayers, Advisen
The cyber market isn’t for the faint of heart or the weak on pricing as the claims experience worsens, but insurers speaking this week during NetDiligence’s fall cyber summit see a way forward with a renewed focus in a hardening market.
In June, the same panel convened to discuss the state of the cyber market, particularly the rapidly rising problem of ransomware. Four months on, they discussed underwriting and pricing amid a landscape of worsening claim frequency and severity. In a sign of the difficulties in turning a profit on cyber, some insurers have bid the market farewell, according to Dan Trueman, global head of cyber for AXIS.
“In the last few weeks alone, we’ve seen carriers exit the market,” said Trueman. “I think it’s safe to say carriers wouldn’t be exiting the market if it was consistent profitability.”
With cyber products in high demand, the market will need to replace the lost capacity and keep pressure on pricing, Trueman added.
The savvier insurers will fare better, the panel predicted.
“I believe that there are carriers in the market that are better able to handle losses at a lower cost than other carriers and it’s giving them a real competitive advantage,” said Nick Economidis, vice president with Crum & Forster. Having the ability to direct claims to vendors that can best handle the event efficiently and effectively makes a significant difference, he said.
“Over the course of many losses, it adds up,” said Economidis. He suggested that underwriters made mistakes in evaluating risks, discounting the true risk for industries like manufacturing or other sectors that don’t hold much personal data but rely on connected systems.
“It came to be a very underpriced segment of the market because we didn’t price for that systemic risk,” Economidis said.
Shannon Groeber, executive vice president with CFC Underwriting, pointed out that while all insurers say they want more rate, it isn’t the only solution. “There are a number of levers” to improving profitability, including controlling losses from the outset with the use of appropriate vendors, she explained.
In response to a question from moderator Florence Levy, managing director and leader of Marsh’s western region cyber practice, Groeber also said insurers are likely to look to control losses via subrogation, especially as cyber events with technology service vendors that have been tasked with keeping their clients’ data safe increase.
Asked whether the market is hardening or going through a pricing correction, Trueman responded, “I would have said it was firming a while ago, now I would say hardening.”
Trueman suggested that the trend toward broader coverage has come to an end, commenting, “Coverage has become pretty broad over the last few years … I think it’s fair to say that’s stopping now.”
The market also needs to move toward better pricing on excess layers, he said, where the pricing model underestimated the frequency of events.
“We know the events are happening on greater frequency and we need to be able to price properly for them at the right levels at the right time,” said Trueman. “The methodology we were using for excess pricing was wrong.”
Groeber agreed, adding that excess carriers have for years expressed concerns and now face difficulties with newer entrants to the market “willing to jump on those towers” at lower pricing.
Excess carriers have “far less visibility and control into that expense management than the primary carriers do and they’re expected to just follow the lead and write their check at a much larger discount, which is just not sustainable in the long-term,” she said.
Economidis highlighted dependent, or contingent, business interruption as a coverage insurers haven’t managed well and that some carriers tend to add on without adequate pricing.
“The ones that throw in dependent business interruption tend to win the account,” he said. “That type of loss that could come back to be really a problem. I think people have left their pants down a little on this one.”
With the escalation of ransomware, a trend that is “downright scary” according to Economidis, it should be clear that cyber insurers are paying covered claims, the panel noted.
“We wouldn’t be seeing carriers exit the market if we weren’t paying claims,” said Trueman. “But we must make sure they’re being paid on policy wordings that fit the insured and they’re getting what they expect.”
Groeber said, “We just have to continue to promote and educate how valuable cyber insurance can be for an insured when it does have the right policy language, when it does have the right provisions that are going to allow for that claim to be accepted and when it does actually reflect the true exposure of the insured, versus just the cheapest policy that’s out in the market.”
Economidis agreed. “We all get bad press when people buy shoddy coverage and then they get unhappy when their claim’s not covered,” he said.
Editor Erin Ayers can be reached at [email protected]