Why global cyber insurance market will remain stable in the next 12 months

Geopolitics and AI are ongoing risks that could potentially impact profitability.

The global cyber insurance market should remain “stable”, thanks to demand and growth prospects are strong as cyber insurance uptake increases steadily, AM Best said.

However, looking ahead, geopolitical tensions and AI-driven threats pose ongoing risks, potentially impacting insurers' profitability. The maturity of the cyber insurance market hinges on advancing risk understanding and mitigating these evolving threats effectively.

Other factors contributing to the stable projection are cyber security practices improving continuously, and enhancing profitability expectations in the near term. Underwriting standards and policy terms are also getting better, supported by a robust reinsurance market and access to alternative risk transfer products like insurance-linked securities (ILS).

There's also heightened competition and modest premium growth in the US, potentially foreshadowing trends internationally. 

Sophisticated cyber threats using AI, ransomware, and business email compromises are on the rise, compounded by risks from widespread cloud and software use. Model discrepancies and heavy reliance on reinsurance add further complexity.

Despite these challenges, the cyber insurance market has grown rapidly over the past decade, navigating fluctuating market cycles and addressing rising claims. 

Whilst premiums dipped in 2023 due to lower rates from increased capacity and competition, cyber insurance's impact on insurers' risk-adjusted capital remains manageable. The sector's diversification benefits are significant, particularly for insurers specializing in cyber risks.

Insurers have tightened underwriting standards by excluding risks like cyber war, and enhancing risk management practices. 

Loss ratios have been consistent overall, bolstered by clearer policy language and proactive risk monitoring. Despite initial disruptions from the COVID-19 pandemic, swift repricing and operational adjustments have stabilised the market's performance.

AM Best anticipates sustained growth in cyber insurance due to heightened awareness of cyber risks, especially among small to medium-sized enterprises (SMEs). 

These companies, with less sophisticated risk management tools, are increasingly seeking cyber coverage as they refine their risk strategies.

Whilst cyber threats are evolving, improved cyber hygiene and quicker response times to attacks among insured parties are limiting losses. 

The sector's reliance on reinsurance remains pivotal, with experiments in alternative structures like excess of loss and stop loss, AM Best sad.. Catastrophe bonds are emerging, offering potential to expand capacity, although challenges remain in data collection and regulatory standards.