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Loading up on cyber risk could be a negative for insurers' ratings

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Uncertainties surrounding insurers' coverage of cyber risks now outweigh the benefits of their potential earnings growth from a ratings perspective, Fitch Ratings Inc. said in a report Monday.

“At this stage, Fitch would view aggressive growth in stand-alone cyber coverage, or movement to high portfolio concentration in cyber, as a negative to the ratings,” according to the New York-based rating agency's report, “Global Cyber Insurance Market Update, Expanding Threats Amplify Underwriting Opportunity, Loss Potential.”

“We believe the underwriting, pricing and reserving uncertainties currently outweigh the potential earnings growth benefits” of providing cyber insurance, according to Fitch. “Controlled growth as part of a diversified portfolio, coupled with continually enhanced underwriting standards, would generally be neutral to ratings.”

The report said that while cyber coverage “represents a rare bright spot of positive premium rate movement” for the commercial insurance market, insurers “likely already have a considerable amount of cyber exposure embedded in existing commercial, property and liability policies. As such, an underwriter could have significant accumulations of cyber exposure before potentially adding to risk aggregations through writing stand-alone cyber policies. Practices for including cyber exclusions, sublimits and policy endorsements into existing policies are an evolving area of cyber risk management.”

In addition, insurers “lack a meaningful volume of data on losses and exposures for cyber-related claims, which creates challenges in pricing risk and establishing pricing terms,” Fitch said in the report.

Policyholders need advanced technical expertise and services for defense, and remediation processes following breaches, which leads to questions “whether any long-term role for insurers in cyber risk management will be usurped by more sophisticated firms or Internet providers,” although insurers are gaining more technical expertise, the rating agency said.