Five years ago, Canada’s cyber insurance loss ratio was spiralling out of control.
During the early days of the COVID-19 pandemic in 2020, the cyber loss ratio for Canada’s P&C industry, including Lloyd’s, was a staggering 371.4%, according to data from MSA Research. This means insurers paid out almost $4 in claims for every $1 collected in premiums — an unsustainable business practice.
By the following year, the loss ratio, including Lloyd’s, remained high and unprofitable but had fallen dramatically to 115.4%.
“For the industry, including Lloyd’s, 2019 essentially broke even, with 2020 showing a very large loss ratio and still unprofitable in 2021,” confirms MSA Research president Nevina Kishun. “For the industry without Lloyd’s, 2020 and 2021 were [also] not profitable.”
What changed?
Then something curious happened. Including Lloyd’s, the industry posted a -28.5% cyber loss ratio in 2022, attributable to reserves being pumped into the market to stem the bleeding and offset the losses over the previous couple of years.
MSA data now show the Canadian cyber insurance market has made a grand entrance back into profitable territory. “For 2023 and the first nine months of 2024, it indicates an underwriting profit,” Kishun reports.
Under the IFRS 17 insurance accounting standard, cyber’s gross insurance service ratio (GISR) was 83.4% for the industry, including Lloyd’s, in 2023 and 61.6% without Lloyd’s. As of 2024 Q3, the cyber GISR was a healthy 38% with Lloyd’s, and 70.4% without.
Before 2023, the cyber loss ratio was calculated under IFRS 4, which means it shows incurred claims divided by earned premiums. But beginning in 2023, the data looks at the cyber GISR, the ratio of actual incurred claims and costs directly attributable to acquiring and fulfilling insurance contracts divided by earned gross premiums, Kishun explains.
It’s important to note this new ratio doesn’t include the impact of reinsurance but is similar to the loss ratio under IFRS 4 in that a number under 100 indicates a profit and a number above 100 shows a loss, she says.
Change for, mostly, the better
So, why the dramatic turnaround?
“Underwriting for cyber insurance has become more robust over the years, which provides increased protection to both the insured and insurer,” Kishun says. “This includes a risk assessment, evaluation of current security measures, and in some cases, continuous monitoring and security adjustments.”
The cyber product has evolved into a “perfect marriage of security and insurance coming together, working to the benefit of preventing cybercrime for businesses,” adds Lindsey Nelson, head of cyber development at CFC.
“There’s been a vast improvement on loss ratios over the [last] few years since cyber entered its first hard market cycle in its existence, primarily driven by adjustments to the pricing to better reflect the exposure rather than a sweeping change in cyber threats or risks.”
But there’s still a risk of volatility in the cyber market if current conditions don’t stabilize.
“Premiums are a fraction of the price they were this time two or three years ago, but the threat landscape looks entirely the same,” Nelson tells CU. “As a market, we’re forgetting what drove the hard market in the first place — low pricing matching a high exposure — and neither insurers nor brokers enjoy operating in that market.”
This article is excerpted from one that appeared in the February-March print edition of Canadian Underwriter. Feature image by iStock/wassam siddique
