Sompo Intl’s DePiero: Loss development to deter cyber market from rate reductions

Loss development from 2023 in the cyber market should taper any further reductions in rate, according to Richard DePiero, EVP and head of Sompo Pro US at Sompo International.

“We're gonna see losses from 2023 mature [and] I think you're gonna see a levelling of the market, and maybe a slight increase in the market,” DePiero told The Insurer TV at the NetDiligence Cyber Risk Summit in Miami Beach, Florida.

This is a different scenario from the one that played out post-2018 following the emergence of ransomware, when prices rose “dramatically”.

“So, when we got to 2018, and then through 2019, 2020, you saw rates come up dramatically, because it was responding to something that we had never seen nor had priced in,” DePiero explained.

“But since late 2022 and 2023, we saw a decrease in the market, despite an increase in ransomware activity in May through October,” he added.

DePiero considers how programs are built for cyber when contemplating the challenge around rate movement and an increasingly risky and complex cyber environment.

“For large risk, you saw large increases in the high excess layers, you know, let's say a $25mn x $75mn layer. And now you're seeing those rates come back down more dramatically than the lower attachments that are closer to the risk,” said DePiero. “I think you're going to see those layers grow back up in premium over the next year.”

Cyber ILS

The cyber ILS market continues to make great strides, with several capital firsts, including the first cyber 144a cat bond.

As the market matures, DePiero is keeping an eye on attritional losses and modeling disaster scenarios.

“If markets are comfortable with the attritional loss, and are concerned about the aggregation exposure, I think the efficient use of capital would push more markets to be comfortable with the attritional, and in buying more risk transfer on those realistic disaster scenarios up top,” said DePiero.

“So I think if we're sitting here in the next 12 to 24 months… I think you'll see a continued amount of markets pushing towards that ILS and buying the larger limits,” he added.

But the biggest concern going forward is agreeing on accurate measurements in cyber.

“How do we get the models right? I think that's something that a few people have had some success with,” he said.

Another knotty issue surfaces around deploying limits, said DePiero.

“So, Sompo limits have been about the same, they really haven't changed too significantly in the space. The limits we deploy are typically around $10mn. We do deploy greater than that, but I think it goes back to what we said before – how do we get more comfortable in deploying more limits?

“How do we provide more limits that are more meaningful for our insureds? And I think that's for our larger clients, providing larger limits spread out over a larger amount. So for us, the market has been relatively stable with limits offered,” he said.

SEC changes on the way “a net benefit” to cyber insurers

The US Securities and Exchange Commission (SEC) initiated rule changes late last year that are expected to take effect imminently. DePiero says the new rules will be a net positive for the industry, because it could potentially speed up the reporting process.

“It gets across what insurance needs to be doing. If it's a material event, they need to have a process in place. They need to be reaching out and bringing in experts to resolve,” said DePiero.

“It's going to bring up response times and bring in the right people, at the right time.”

As for headwinds likely to arise during the year, DePIero is watching AI platforms to gauge how sophisticated potential threat actor groups work to deploy these new tools.

“We see them as deploying [AI] in a reconnaissance manner, and once they're in a network and mapping a network,” he said.

At their heels will be cyber insurers trying to beat back the threats, using the same techniques that were used against them. It will come down to an “arms race” said DePiero, between threat actors and insurers.

Watch this 10-minute video to learn more about:

  • Why DePiero expects a levelling of the cyber market, or perhaps even a slight increase
  • How the cyber risk landscape changed in 2018
  • The impact of attritional losses on cyber ILS in 2024
  • The role of accurate measuring techniques on the cyber ILS space
  • What headwinds Sompo is anticipating this year

The Insurer is partnering with NetDiligence® as we gear up for the launch of our cutting-edge dedicated platform – Cyber Risk Insurer– coming this February. Cyber Risk Insurer is poised to become the premier destination for in-depth coverage of the growing cyber (re)insurance market. Stay tuned for more details…