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Global cyber insurance market could triple in size by decade's end, says report

Out-Law News | 16 Sep 2015 | 3:08 pm | 2 min. read

The global cyber insurance market is at a "turning point", an expert has said, because the costs of cyber attacks and security breaches have reached a level that business cannot ignore.

At the same time, more and more insurers are beginning to exclude cyber risks from general liability and professional indemnity policies, encouraging businesses to buy separate cyber cover, according to cyber risk expert Ian Birdsey of Pinsent Masons, the law firm behind Out-Law.com. Birdsey was commenting as a new report, published by professional services firm PwC, predicted that the global cyber insurance market could triple in size by the end of the decade, from $2.5 billion to $7.5bn.

"To see how the global cyber insurance market could grow, you need only look at the experience in the US and Canada, where the growth of the market has been boosted by a number of high-profile data breaches brought to prominence under US state notification laws," he said. "There is an obvious parallel to draw here with the EU's new data protection regulation, which will introduce similar reporting requirements."

"As the potential cost of data breaches reaches the hundreds of millions, if not billions, businesses have reached the point where transferring the risk - however small - to an insurer makes commercial sense. And for smaller firms in particular, the fact that many of these products now offer them access to a team of experts in the event of a breach such as specialist lawyers, IT forensics experts and crisis management and PR, which they may not have the resources to take care of themselves, is an attractive proposition," he said.

According to PwC research, 61% of business leaders across all industries have now accepted that cyber attacks present a real threat to the growth of their business, while there was an average of 100,000 such incidents globally every day in 2014. However, many firms have questioned whether the high costs of coverage, limits imposed and tough terms and conditions typically attached to cyber insurance policies mean that these products provide real value for money.

The report concluded that insurers, reinsurers and brokers could capitalise on the increasing demand for these policies while managing their own cost exposures by partnering, sharing and coordinating with technology companies and intelligence agencies on their risk evaluation, screening and pricing processes and sharing data with other providers to ensure greater pricing accuracy.

It also suggested replacing the traditional annual renewals process with real-time analysis and rolling policy updates, in order to take into account the rapidly changing nature of cyber risks. Insurers could also consider making coverage conditional on full and frequent assessments of policyholder vulnerabilities and pre-agreed prevention and detection steps, perhaps including regular exercises to mimic typical attacks in order to highlight policyholder weaknesses and allow them to plan their responses.

The growing cyber insurance market could also create more opportunities for reinsurance companies, particularly if firms worked together to develop models for exposure, potential losses and systemic risks, the report said. PwC proposed the introduction of 'hybrid' risk transfer structures, based on a combination of traditional reinsurance in the lower lawyers and capital market structures for 'peak' losses, which it said could "prove appealing to investors looking for diversification and yield".

Paul Delbridge, one of PwC's insurance experts, said that cyber risk was "a risk like no other" to insurers. However, it was "equally an opportunity", he said.

"Insurers who wish to succeed will base their future coverage offerings on conditional regular risk assessments of client operations and the actions required in response to these reviews," he said. "A more informed approach will enable insurers to reduce uncertain exposures whilst offering clients the types of coverage and attractive premium rates they are beginning to ask for."