The next decade will be the most important period of growth for the cyber insurance market as rapid digital transformation brought on by the COVID-19 pandemic increases vulnerabilities to attacks, S&P says.

Cyber insurance premiums will grow 20-30% a year on average in the near future, it says.

Market penetration of cyber insurance products has so far remained relatively low despite the area being among the largest risks for organisations globally. S&P says the estimated yearly economic costs of cyber crime already exceeds $US700 billion ($965 million), but insured cyber losses are still very small at below $US5 billion ($6.84 million).

This leaves plenty of untapped potential, and small and midsize enterprises will be a key avenue for growth.

“In most developed global markets cyber insurance will become one of the key growth areas for insurers in the next decade, partly because many larger lines of business, such as motor and property, are saturated,” the ratings agency says.

“The coming decade will be a game-changer for the cyber insurance industry if insurers can tackle the associated challenges – in particular the accumulation risk.”

Underwriting cyber insurance is more sophisticated than conventional insurance cover, with the insurer heavily relying on modelling and scenario calculations, as well as qualitative judgement. Calculating an appropriate price for cyber insurance is also more difficult, given the dynamic nature and sophistication of cyber crime.

While a severe natural catastrophe can affect many countries, it is limited to a certain region. Cyber risks are not limited by geography and can easily spread across the globe in a few seconds.

“Cyber risk underwriting poses various challenges to insurers,” S&P says. “The accumulation of claims within a cyber insurance portfolio…can expose insurers to high financial losses.

“For insurers, this demand means huge opportunities but also large risks.”

It says insurers will have to offer more relevant products and carefully evaluate and monitor exposures to maintain credit strength . They should focus on identifying, quantifying and modelling cyber risks across their portfolios to expand sustainably and profitably.

S&P advises insurers to educate policyholders about cyber risks and add value by providing assistance services to better handle cyber risks.

“If insurers only focus on compensation for claims, we see less potential to develop a sustainable and profitable cyber insurance market in the mid-to-long term.”