Cyber and fire are examples of the way risk is rapidly evolving: Moody’s

Cyber is a very new kind of risk, quite unlike any that insurance companies have dealt with before, according to Simon Harris, managing director in the global insurance and managed investments group at Moody’s.

While insurance companies have launched new lines of business that cover new types of risk before, Harris does not believe those experiences will help them much as they struggle to come to terms with their cyber exposures.

“Insurers are very cautious about cyber, it is very different from cat risk because it is so correlated. The lack of available data, due to its being such a young market, makes insurers and reinsurers nervous,” he said.

Silent cyber exposures, which insurers have still not been able to calculate, further complicate the picture, added Sid Ghosh, senior analyst at Moody’s.

“Insurers do not know what level of contagion there will be from cyber throughout their business, unless they have written clear exclusions,” he explained.

Insurers are struggling not only to come to terms with increasing demand for cyber, and with how to price that risk. Risks older than insurance itself, such as fire, have taken the industry by surprise. To some extent, climate change is repackaging old risks as new ones.

Ghosh said: “The sheer size of US wildfires, and the fact they happened two years in a row, took people by surprise, including reinsurers, insurers and investors.”

Warmer conditions in the US encouraged faster vegetation growth than usual, while also drying it out. With the brush uncleared, conditions were perfect for fire to spread. Crucially, models had not adequately factored in population changes, with property values in the affected areas higher than insurers realised.

Brendan Holmes, senior credit officer at Moody’s, said: “Aggregation is hard work, but insurers had not properly aggregated the risk.”

Other secondary catastrophe risks, including floods and storms, may be in a similar situation.

Harris stressed insurers would adapt to the new challenges they face.

“Exposures are changing, the climate is changing, but insurance has always been that way,” he said. “Risk is always developing and insurers have always found a way to change with it.”