Specialty Market Keeps Grip on Cyber Risk

By: Judy Greenwald, Business Insurance, October 2016

ATLANTA — Cyber liability insurance is offered by most big-name insurers, but it remains, and will continue to remain for the foreseeable future, largely an excess and surplus lines product.

The changing nature of the coverage and the size of the risks involved make it a natural for the nonadmitted market, experts say. However, admitted insurers have made inroads into the cyber liability insurance sector and will likely grow their share, they say.

David J. Bresnahan, Boston-based executive vice president of Berkshire Hathaway Specialty Insurance Co., said he estimates that some 90% of cyber insurance business is in the nonadmitted market.

“Most people write it on a surplus lines basis because the market is changing so rapidly,” Mr. Bresnahan said. “It would be difficult for me to imagine us ever seeing the majority of premiums going to the admitted market.”

He added, however, “There’s a place for admitted cover when you’re insuring smaller commercial risks” where the coverage may be included as part of a package policy.

This was among the topics of discussion at the National Association of Professional Surplus Lines Offices Ltd. conference held Sept. 25-28 in Atlanta.

Scott Barraclough, president and CEO of Mount Laurel, New Jersey-based Admiral Insurance Co., also said he sees cyber liability continuing as an E&S line.

“There possibly could be some small bolt-on cyber coverage that the standard market would introduce, but true high-risk cyber exposure will stay in the E&S market,” and the coverage will keep evolving. “I don’t think that’s one that’s going to become uncomplicated at any time in the near future,” he said.

Others are less certain about how much cyber will remain in the E&S market.

“Right now, the vast majority of the business in cyber is nonadmitted because the product is new, without a lot of experience,” said Alan J. Kaufman, Farmington Hills, Michigan-based chairman, president and CEO of H.W. Kaufman Financial Group and Burns & Wilcox Brokerage.

“Over the next five years, cyber will remain a specialty product. After that, it’s hard to predict,” he said.
This will be determined by its results over the next five years, “which nobody has a handle on yet because it’s such a new product,” Mr. Kaufman said.

However, Hank Haldeman, executive vice president of The Sullivan Group, a Los Angeles based wholesaler and underwriting manager, said while cyber coverage was pioneered in the E&S market, “it is also moving rapidly into the standard market for many industries and for smaller firms.” How that develops will be interesting, he said, “because we’ve got a product that’s untested” in terms of pricing volatility and coverages, “yet a lot of admitted markets are now providing some form of cyber cover.”

“Most of the major stock carriers are providing some form of cyber now,” including some that are providing a “full-blown” cyber product with full limits as part of the management liability marketplace, Mr. Haldeman said.

“I’m not sure that people in these lines of business realize just how far that has gone,” said Mr. Haldeman. That said, the need for cyber skills is still very significant, “and the E&S market certainly retains the lead in terms of providing stand-alone cyber products,” he said.

“I think the standard lines carriers have done a great job of drawing a line in the sand and have not encroached on what actually should go into the E&S space. They do this by implementing tight underwriting guidelines and performing strict due diligence in identifying unique characters outside of their appetite,” said Jude DiBattista, New York-based senior vice president and head of E&S property/casualty for QBE North America.

Jacqueline M. Schaendorf, president and CEO of Atlanta-based Insurance House Inc., a managing general agency and wholesale insurance broker, said, “I think it’s definitely going to trend towards more of a standard coverage,” just as with employment practices liability, where initially just a handful of insurers wrote it and where multiple insurers now write it in the standard market.

As insurers understand the risk and exposure better, it will become structured “in a manner that standard markets are comfortable writing it,” with appropriate sublimits for specific exposures and appropriate aggregate limits for massive events, she said.

However, David W. Schraeder, Houston-based senior vice president of the custom accounts division at Hartford Steam Boiler Inspection & Insurance Co., a unit of Munich Reinsurance Co., said, “I have had equal numbers of wholesalers and retailers say to me, ‘It doesn’t matter to us whether it’s on admitted or nonadmitted paper.’”Business Insurance