Cyber could impact a re/insurer’s financial strength – AM Best

A growing cyber book could present a risk to a re/insurer’s financial strength if not managed appropriately, according to a new report from Rating agency AM Best. The report, titled Scrutiny of Management Approach Increases as London Cyber Insurance Market Grows, says that while cyber risk has gained significant attention in recent years following a number of high profile hacks and breaches, the aggregate loss potential of cyber and its implications for the London insurance market are less clear because insurers have not yet experienced a systemic cyber event from which they can draw robust conclusions.

In the UK, insurance companies’ cyber stress tests indicate gross losses could outstrip annual cyber premiums (excluding non-affirmative cover) several times over, according to a Prudential Regulation Authority (PRA) survey in 2018.

“The PRA survey suggested a cyber catastrophe could significantly alter the dynamics of the market,” said AM Best.

It said that, as competition continues to intensify, there is likely to be a widening and harmonisation of cover globally.

“This could result in an increased frequency and severity of insured losses,” said AM Best. “In order to maintain the stability of technical results in a softening market environment, AM Best expects companies to continue to exercise prudence in their pricing assumptions and risk selection.”

AM Best added that it will expect companies writing cyber to articulate how they manage the risk of potential earnings volatility in this book and whether they possess sufficient reserving and pricing expertise.

“In addition, AM Best will evaluate whether a company is able to utilise innovative technology and data analytics to support future technical profitability,” it said.