If you thought cyber was hard to sell before…

Cyber claims have skyrocketed recently thanks to the COVID-19 pandemic, and the relatively young class of business has entered a hard market, meaning that an already-tough-to-sell insurance product may become an even harder sell, according to an expert in the area of cyber coverage.

MSA research reported in its Quarterly Outlook Report that in the second quarter of 2020 (the three months ending June 30), insurers posted a loss ratio of more than 1,100% in the cyber insurance line of business.

How things have changed over the past 12 months, as Lindsey Nelson, cyber development leader at CFC Underwriting, observed recently. “At this time last year, we were saying that coverage is as broad and as competitively-priced as it’s ever going to be.”

Today, however, the cyber market looks different. “Losses are building against what has historically been very low prices and small portfolios amongst the cyber insurers,” Nelson said.

Numerous organizations reported spikes in cyberattacks as a result of COVID-19. “We’re hearing about more fraud attacks with the work-from-home setup,” explained Rob Boyle of Intact Insurance in the August/September issue of Canadian Underwriter. Boyle is Intact’s vice president of specialty solutions, errors and omissions, and directors and officers in Canada, as well as the entertainment segment in North America.

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“The controls that companies have put in with respect to setting up working from home may not be as robust as some of the controls they might have in their offices,” he noted. In particular, he highlighted social engineering fraud, which happens when employees are tricked into performing actions like transferring money into a fraudster’s bank account.

The cyber market is still relatively young in Canada — and small, at about $120 million in annual gross premiums written, Nelson told Canadian Underwriter. “So when we look at big-scale losses, full-limit losses, you can see how it only takes a handful of those losses to completely make the entire Canadian cyber market unprofitable, let alone for specific insurers and their relative books.”

Brokers should brace themselves for insurers to readjust their approach in the cyber marketplace. “There is a tendency for readjustment after there have been losses that are built up,” Nelson said. “Again, when we’re talking about a relatively small book size in the Canadian market, you can see that adjustment happening quite quickly amongst insurers. So, it comes down to the decision of the cyber insurer, of course, of how they want to limit their exposure going forward on a portfolio basis.”

The scenario may not be much different than when other lines of business go through their own periods of readjustment, as Nelson notes. There are challenges when insureds purchase E&O, D&O and property policies, “where those markets are going through some readjustment,” Nelson said. She acknowledged that it can be difficult for brokers to sell a new line of coverage as the program goes through a rate increase.

Still, she doesn’t envision insurance carriers reducing coverage. There’s exposure for any business that has a computer, and employees and companies need to show that the cyber product line is an effective way to transfer that risk.

“Cyber policies are always going to offer that coverage,” Nelson said. “But there is a right price for that coverage. And with the claims landscape evolving more last year than [during cyber’s] 20 years of existence as a product line, the cyber market as a whole has realized that we don’t have that price right just yet. So it’s very much a reality that we are in a hardening, rather than a firming, cyber market as of today.”

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