In the evolving age of digital risk, cyber insurance has emerged as a preferred method for businesses to protect themselves, writes Shawn Ram, head of insurance at Coalition.
In the evolving age of digital risk, cyber insurance has emerged as a preferred method for businesses to protect themselves.
But as the demand for cyber insurance grows, so must reinsurance capacity to properly support the overall demand.
The challenge is that the cyber reinsurance market, as it is currently positioned, faces significant hurdles to overcome before it can help substantially reduce worldwide risk.
Understanding key challenges in cyber reinsurance
1. Systemic risk and cyber event aggregation
Major cyber events like the attacks on Change Healthcare and CDK Global, and the CrowdStrike systems outage, showed how a single incident could lead to significant business interruptions and downstream impacts.
The most pressing challenge in cyber reinsurance is managing this type of systemic risk—the potential for one event to trigger widespread losses across multiple organizations—a domino effect of sorts.
Traditional insurers and reinsurers have historically focused on isolated events, overlooking the interconnected risks that can arise from a single point of failure.
2. Market conditions
The pandemic accelerated the digital transformation of businesses, leading to an increase in cybersecurity-related events and, particularly, a rise in ransomware.
The surge in cyber incidents caused a hardening of the cyber insurance market. This, in turn, drove up rates and attracted more entrants to the market, resulting in an oversaturation and eventual market softening once more.
Now, we’re seeing a market environment where claims frequency has increased, but rates continue to decrease. This situation has created a disconnect between price and risk, making it harder for reinsurers to maintain profitability while meeting market demand. Adequate pricing, especially for systemic risks, remains a major concern.
3. Underwriting practices differ widely across the industry
Unlike other insurance sectors, such as property and casualty, where underwriting practices and core data elements are largely standardized, cyber insurance risk assessment is inconsistent.
Different insurers use varying data sources, methodologies, and technologies, leading to different pricing and misaligned best practices. This lack of cohesion makes it difficult for underwriters to accurately assess exposure and for the primary insurer to understand the true risk profile of their clients.
Overcoming these obstacles: the path to improved cyber reinsurance
To address these challenges, cyber insurers must evolve toward a more data and technology-driven, detailed modeling approach.
Continuous real-time data collection and advanced analytics are essential to understanding and predicting exposures. Integrating machine learning tools can help reinsurers identify patterns in loss frequency and better assess systemic risk. These insights can provide a clearer picture of the potential scale of a loss and predict future exposures.
Reinsurers are developing new models incorporating risk mitigation strategies, allowing primary insurers to better understand the individual risks within large portfolios.
For example, Coalition’s model analyzed 5,000 large US companies to model cyber risk and understand aggregation through shared technology infrastructure, or “aggregation technologies and vendors (ATVs)”.
This approach helps reinsurers analyze exposure at the portfolio level and mitigate correlated technology risks rather than focusing on more basic information like company size and industry. This modeling method can guide pricing and capital allocation decisions to a much more specific level.
The reinsurance industry must also play a more proactive role in risk mitigation. Companies that provide not only capital but also the tools and technologies to reduce risk exposure are more likely to be more successful in the long run.
Real-time data about cyber risks can help insurers prevent losses by identifying and addressing vulnerabilities before incidents occur. Offering clients risk-reduction technologies can strengthen the overall risk profile of cedents and help reduce claims frequency.
Finally, the market must embrace innovation; technology is arguably the most significant opportunity in cyber reinsurance.
Artificial intelligence, for instance, can help reinsurers scale their risk assessments by analyzing large datasets and identifying “unknown unknowns”—potential risks that may not be immediately obvious. AI-enabled threat detection, combined with industry-leading risk modeling, can provide more accurate insights into exposure and improve decision-making.
Moving forward
Managing systemic risk, improving underwriting practices, and embracing technological innovations for better insights into exposure are all crucial for the future of cyber reinsurance.
As businesses across industries increasingly rely on technology, cyber risks will only become more pervasive. The cyber reinsurance market must adapt accordingly by offering more than just capital—providing the data, insights, and expertise necessary to navigate this complex landscape.
By Shawn Ram, head of insurance, Coalition
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