Cyber insurance faces ‘race to the bottom’ over soft rates and overcapacity

Cyber insurance is in danger of becoming a race to the bottom in an environment of cut-price rates, overcapacity and new entrants flooding the market, experts have warned.

Allen Burzen, vice president of sales at data response specialist CyEx, conceded that cyber has become “a race to the bottom for vendors. It’s who can provide the services cheapest”. 

He was speaking as part of a panel, The State of the Cyber Market, at the Intelligent Insurer Cyber Risk & Insurance Innovation conference in Chicago on April 21. 

Other panelists included Will Handley, cyber underwriting executive, vice president at MSIG USA; Rich DePiero, EVP at Sompo and Natalia Santiago, EVP & US head of cyber claims, Howden. The moderator was Bob Parisi, head of cyber solutions – North America, Munich Re.

Ongoing competition and pressure to provide capacity were feeding into the race to the bottom, Parisi noted. He attributes the many recent entrants into the market to perceived growth opportunities driven by new reinsurance capacity.

“Reinsurance has seen new capacity, be it MGAs or new carriers getting in and new capital being provided,” DePiero agreed. “You’ve had new reinsurance treaties on non-proportional risk markets walk away from the direct quota share, so you have a lot more capacity there.”

The panel also considered why almost all US cyber insurers are focused on the middle market, despite its challenges, which DePiero described as “a very hard segment”. 

“Your premium is lower, your losses are higher, especially as you get to that $500 million to a billion-dollar band,” he explained. “We all want to see that space be more profitable. As someone in that segment, we really do believe in an industry and control-based underwriting system, and the E&O in that segment is very difficult. So why are they running into there? I don't know, but it’s a very difficult segment which we try to approach in thoughtful manner.”

Parisi also questioned the whole premise of long-term sustainability of insurers continually adding bolt-on services to insurance products aimed at SMEs, given already high combined ratios and reinsurance constraints.

“I think we’re talking about something that long term is not properly sustainable,” DePiero said.

Another question considered was the sometimes-fraught relationship between brokers and defensive chief information security officers (CISOs), who are frightened of being shown up by inquisitive brokers. 

Santiago raised concerns about brokers asking cybersecurity questions in front of CISOs, which could threaten their authority.

“If you see the CISO and a client or a potential client, and you start asking control questions, are they going to feel threatened by the fact that you’re talking in front of the C-suite and questioning their work?” he explained. “They feel like they’ve been questioned whether they're doing a good job or not.”

Instead of being confrontational, brokers should prepare CISOs to showcase their expertise to underwriters, especially in large accounts. Large, mature organisations are less likely to defer risk management to CISOs, creating a fundamental hurdle, Handley said.

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