Cyber coverage a double-edged sword for insurance industry

Cyber insurance is a growth opportunity for the insurance industry that also presents an “incalculable threat,” says Fitch Ratings Ltd. in a report issued Thursday.

While cyber insurance represents a key growth area for the industry, it also has the potential to cause significant losses because of substantial aggregation risk and the increasing sophistication of cyber attacks, says the report issued by Fitch's London office.

Furthermore, insurers face the same cyber risks as their policyholders, says the report, “The Rise of Cyber Insurance, Growth Opportunity Paired with Incalculable Threat.”

Cyber risk also has features that make pricing difficult using traditional actuarial methods, says the report.

“Modeling of cyber risk exposures is still in its early stages, and detailed incident data and claims experience is not largely available today. Losses could materialize from several products, including standard commercial liability policies, business interruption and professional liability.”

The report says governments will inevitably have an increasing role to play in the prevention and indemnification of global cyber attacks, given the potential magnitude of losses. “However, insurance companies will also have an important role to play alongside of any government initiatives,” the report says.

Some observers have suggested a federal backstop for cyber risks akin to that for terrorism may eventually be feasible.

The Fitch report also suggests there is an opportunity for noninsurance entities to enter the market as either partners or competitors to existing players. These could include tech firms such as Mountain View, California-based Google Inc., Cupertino, California-based Apple Inc. or Menlo Park, California-based Facebook Inc., and data protection companies such as Moscow-based Kaspersky Lab.