Wake-up call from Morrisons’ data breach class action

05 December 2018

Companies and their insurers increasingly find specialist cyber insurance a more attractive option than extensions to traditional insurance, as buyers seek dedicated coverage and underwriters look to clarify cyber cover under traditional insurance.

SPECIALIST COVER

Partner Re’s recent Cyber Survey found that buyers continue to switch from endorsements to standalone cyber policies – recognising the value of dedicated limits, higher limits and expanded coverage. The finding suggests that buyers are becoming more sophisticated when it comes to cyber risk and are likely to trade up to the specialist cyber insurance product, having dipped their toe in the water with cyber endorsements.

The survey, which polled some 340 brokers and underwriters worldwide, found the desire for dedicated limits was the biggest reason for switching from endorsements to standalone cover - 70% of respondents cited this as the reason. Cyber cover under extensions is typically limited, narrow in scope and has smaller limits. In addition, extension cover would not typically give access to breach response services available with specialist cover.

The second biggest reason for switching to cyber insurance was to access expanded business interruption or contingent business interruption cover (49%), which was also cited as the most popular coverage sought at renewal by cyber customers.

Companies also switched to access other forms of expanded cover (46%) and gain access to breach response services (41%). Brokers and underwriters also reported clients seeking higher limits than they could acquire by endorsement (44%).

The decision to switch appears to be a conscious one. Only 9% of respondents said policyholders had switched to standalone cover following claims experience, while a handful did so to meet contractual obligations. The report says buyers are pro-active in seeking broader cover for cyber and have taken the advice of brokers who recommend the broader coverage and more specialised expertise in the cyber market.

SILENT CYBER

While buyers increasingly recognise the benefits of standalone insurance, underwriters are also shifting their focus towards cyber insurance.

UK insurers are under regulatory and commercial pressure to better understand cyber exposures in traditional property/casualty coverages, both affirmative and non-affirmative (also known as silent cyber). For example, pharmaceutical group Merck reportedly sought to claim USD 2 billion from insurers following the 2017 NotPetya malware attack, of which USD 1.75 billion was silent exposure and USD 250 million was covered by the firm’s affirmative cyber insurance policy, which paid out.

The JLT Re paper ‘Unlocking the potential of the cyber market’ concluded that the standalone cyber insurance market was best placed to provide innovative sustainable cyber insurance solutions in the long term. As more premiums flow into the standalone market, insurers will be able to evaluate and price risks more accurately, as good-quality claims data and sophisticated modelling tools become increasingly accessible.

BI VS GDPR

Interestingly, the Partner Re survey found that business interruption was the most sought after cover when purchasing cyber insurance, despite the introduction of the General Data Protection Regulation (GDPR) in May. The new regime increases the cost of a data breach, including first party and third party liability exposures.

The survey, carried out in conjunction with Advisen, found that new and renewal cyber insurance buyers most frequently requested cyber-related business interruption (BI) coverage. For the first time, cyber-related BI (cited by 60% of respondents) replaced data breach as the most sought-after coverage, which slipped to third place at 54%. Fraud and social engineering (55%) was the second most requested coverage, while extortion came in fourth (52%).

The biggest drivers for purchasing cyber insurance remained news of a cyber loss (56%) or experience of a cyber loss (50%), followed by a requirement from third parties (42%). Regulatory change was not cited as a top three reason for purchasing, with only 33% of brokers and underwriters citing this as a factor.

However, 60% of respondents say that the GDPR will lead to higher third party claims losses than we are currently seeing in the US, while half believe that the regime will lead to higher first party costs. Some 71% say the GDPR will not have much of an impact on buyers until there are headline losses, while only 43% believe that the GDPR will affect current pricing levels.

SME UPWELLING

The survey also revealed an influx of new-to-market buyers of standalone cyber insurance, the majority of them from small- to medium-sized enterprises (SME). Healthcare, manufacturing and professional services accounted for most new buyers – manufacturing was up from sixth place in 2017. The trend may reflect an indication that smaller businesses are beginning to better understand their cyber risks, the report says.

Some 90% of respondents say that the cyber insurance market in 2018 is more competitive than 2017 – while pricing and coverage are becoming more consistent. However, 67% of brokers limit the number of carriers that they will place primary coverage with, due to the wide variety of policies and language in the market.

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For further information, please contact Sarah Stephens, Head of Cyber, Content and New Technology Risks on cyber@jltgroup.com

 

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