Cyber rates are moderating, even softening, from their historic highs seen in previous years. Yet, a growing protection gap, lack of diversification and increased sophistication in artificial intelligence (AI) attacks could halt the market yet, an AM Best expert shared during the rating agency’s Canada Market Briefing.
“Now insurance companies are so comfortable to the point that in the second quarter 2024 we saw in negative 1.7% in terms of rates, according to the [U.S.] Council of Insurance Agents and Brokers,” said Sridhar Manyem, director at AM Best.
“So, you’re seeing the market softening a little bit, and we’re also seeing growing sophistication of attacks using AI.”
Though things are looking good for the market, experts must remain aware of the headwinds that could make cyber coverage sway.
For example, cybercriminals can use AI-generated deepfakes to circumvent identity verification systems and raze company accounts to conduct their fraud.
But cybercriminals are also able to exploit their human victims much easier through AI, too. They can use AI tools like ChatGPT to write highly convincing phishing emails.
“We are seeing a lot more claims and people falling for that because of exaggerated and enhanced AI techniques,” said Manyem.
Risk aggregation is also of concern to AM Best, he said.
“While you cannot really hide behind diversification [of the risks you cover], even in a climate-related scenario — at least climate I mean, you can expect that an earthquake in Japan is not going to occur at the same time as hurricane in Florida at the same time as European floods…But with cyber, there’s no hiding.”
The CrowdStrike outage, for example, levelled software globally and didn’t discriminate by industry. Though little losses came from that event, “there’s no concept of diversification when it comes to cyber,” says Manyem, and that leaves insurers vulnerable to a major event.
On the other side of that coin, the cyber protection gap is cavernous. And it means clients aren’t covered for their risks.
For natural catastrophes in developed countries, there’s close to a 30% to 40% protection gap between insured and economic losses.
Though not nearly where it should be, for cyber those figures are more extreme.
“In cyber, [the protection gap] is like 90%. The economic losses might be $100 billion and $100 million, and your insured losses will be only $10 million,” he says. “That speaks to the fact that insurance companies are still a little hesitant of, ‘how do I offer higher limits without exposing myself?’ So we think improvements in underwriting and modelling [are] going to help close the protection gap.”
Feature image by iStock.com/NicoElNino
