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Uncertainty surrounding the likelihood and severity of cyber attacks are stunting the growth of cyber insurance in Europe, a report issued last week by the European Network and Information Security Agency contends.
The report, “Incentives and Barriers of the Cyber Insurance Market in Europe,” said the novelty and lack of historical data about cyber attacks are also inhibit the cyber insurance market.
“The lack of solid actuarial data often feeds into two problems about cyber-insurance,” according to the report. “Firstly, the question of adverse selection (the insurer cannot differentiate different types of customer before a contract is signed and therefore price the premium accordingly) and, secondly, the moral hazard where the insured, once a contract is signed, may be incentivized to behave more insecurely in the knowledge that the insurer will bear some of the loss.”
Moreover, the report notes that the rapidly changing nature of technology complicates matters further. “Technology drives fluctuations in risk and threats so that it is difficult (from an actuarial perspective) to predict future losses from past events,” the report states.
Nonetheless, the report notes that a market need for cyber insurance exists, especially in Europe. “Traditional coverage policies may not comprehensively address the risks faced by an organization as part of the digital economy,” the report states. “In the U.K., only a handful of insurers offer specialist cyber-insurance products, compared to 30-40 carriers in the United States (suggesting that a more mature market exists in the United States).”
One reason for this geographical variance is due to differing laws, the report contends, noting that the U.S. government passed the Terrorism Risk Insurance Act in 2002 to act as a backstop for insurance claims related to acts of terrorism. “TRIA creates a U.S. government re-insurance facility to provide coverage to companies following a declared terrorist event,” the report notes.
A corresponding lack of an “upper bound” in Europe stymies the market, the report concludes. "Reinsurance could act to help reduce the insurers own risk of ruin from a number of claims for large amounts being made at the same time,” according to the report. “Its absence might act as a deterrent on the demand side too. This is because the prospective insured might not think the insurer would be able to pay up in the event of a large claim being made and therefore be more reluctant to buy insurance.”