With the world becoming increasing reliant on digital forms of data storage and communication, cyber insurance is a fast-growing market. Cyber insurance is a class of insurance intended to protect both individuals and businesses from internet based risks, such as hacking or other data breaches, as well as losses resulting from problems with IT infrastructure. Current predictions of the size of the global cyber insurance market suggest rapid growth will occur over the next five years, with the total market size increasing from around eight billion U.S. dollars in 2020 to just over 20 billion U.S. dollars by 2025. The vast majority of the market is for corporate insurance. Cyber incidents have the potential to damage both the bottom line and the reputation of a company and were consistently deemed to be one of the leading risks to businesses worldwide in recent years.
A growing need for cyber insurance
Even with the forecasted growth of the industry, many experts worry this may not be enough given the increasing prevalence and cost of cyber-crime. For example, the number of annual data breaches in the United States has increased more than threefold since 2012, while the average cost of a data breach to U.S. businesses has increased by around 60 percent. Despite this increased risk of losses from cyber risks, approximately 40 percent of German medium-sized companies had yet to consider purchasing cyber insurance.
How will increasing cyber insurance claims affect insurers?
The rise in cyber attacks on organizations has led to increasing claims due to the losses incurred. If the value of premiums earned, which is the revenue an insurance company earns on an insurance policy, doesn’t cover the costs of claims payouts, then the loss ratio of the insurer increases. This ratio is an important measure of profitability because it provides an overview of the financial health of the insurance company. Generally speaking, a loss ratio of between 60 and 70 percent is seen as a financially sustainable level. The loss ratio of French cyber insurance companies doubled to exceed 160 percent in 2020 due to a higher volume of claim payouts than earned premiums. Meanwhile, the loss ratio for standalone cyber insurance policies in the U.S. remained around 70 percent in the same year.
