The Cyber insurance market has seen rapid growth in recent years, with quick and volatile market cycles that are much more compressed than the slowly evolving cycles experienced across many other business lines.
This volatility is largely due to the constantly changing threat landscape in the Cyber insurance market; these external pressures make it a difficult market in which to operate.
Here are eight reasons why Cyber insurance pricing is so unpredictable:
1. Evolving Threat Landscape
The nature of cyber threats is constantly changing. New vulnerabilities, attack methods and sophisticated ransomware strains can suddenly alter the risk profile, leading to significant fluctuations in premiums.
2. High Frequency of Claims
As cyberattacks become more common, insurers face more frequent claims, which can drive up costs. If a year sees a spike in major cyber incidents, insurers might raise premiums to cover the increased risk.
3. Data Scarcity
Reliable historical data on cyber incidents is still limited compared to other types of insurance. This lack of data makes it harder for insurers to predict risks accurately and can lead to pricing volatility as they adjust to new information. The lifecycle of a claim is getting longer, transitioning cyber claims from a short tail to a longer one. As a result, insurance companies are paying on a given claim for a longer period, making it tougher for them to accurately predict reserves and overall loss costs.
For instance, while a smaller percentage of ransoms are being paid compared to recent years, the efforts and costs associated with mitigating ransomware attacks — such as forensics, business interruption, reputational damage quantification, and more — are taking longer to resolve.
4. Regulatory Changes
Evolving regulations and compliance requirements can impact the cost of cyber insurance. For example, new data protection laws may change the landscape of coverage needs and risk, affecting pricing.
5. Market Competition
The Cyber insurance market is still developing, with insurers frequently entering and exiting the market. This competition can lead to pricing fluctuations as companies adjust their strategies to gain or retain market share.
6. Risk Mitigation Practices
Companies' efforts to improve their cybersecurity posture can influence their premiums. Insurers may adjust pricing based on how well a business is managing its cybersecurity risks, leading to volatility as organizations adopt or change their risk management practices.
7. Loss Severity and Impact
Large-scale data breaches or significant cyber incidents can lead to severe financial losses for insurers. These high-impact events can prompt insurers to adjust their pricing models to better account for potential future losses.
8. Reinsurance Market
The availability and cost of reinsurance, which insurers use to manage their own risk, can affect cyber insurance pricing. If reinsurance becomes more expensive or less available, primary insurers may pass those costs on to policyholders.
The dynamic nature of cyber threats and the relatively young and evolving state of the Cyber insurance market contribute heavily to its pricing volatility.
