Cyber insurance offering and performance: an analysis of the U.S. cyber insurance market
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Cyber insurance offering and performance: an analysis of the U.S. cyber insurance market Xiaoying Xie1 · Charles Lee2 · Martin Eling3 Received: 15 September 2019 / Accepted: 4 June 2020 © The Geneva Association 2020
Abstract This article examines the determinants of cyber insurance participation, the amount of coverage offered and the performance of current cyber insurers. Our results support the competitive advantage hypothesis, but only partially support the business growth constraint hypothesis. We find that insurers offer cyber insurance to capitalise on their competitive advantage in understanding and pricing cyber risks. In particular, professional surplus insurers and insurers with surplus insurer affiliation demonstrate a competitive advantage in cyber insurance participation. We find limited evidence that insurers participate in cyber insurance to compensate for constraints on business growth. In addition, the type (standalone or packaged) and amount of coverage offered vary substantially across firm characteristics. Standalone coverage incurs higher loss ratios than packaged coverage, demonstrating its riskier nature. Changes in cyber insurance loss ratios are not driven by premium growth but by claim frequency and severity growth, emphasising the significance of cyber insurance policy design. Keywords Cyber risk · Cyber insurance · Surplus lines · Property-casualty insurance
* Xiaoying Xie [email protected] Charles Lee [email protected] Martin Eling [email protected] 1
Mihaylo College of Business and Economics, California State University, Fullerton, 800 North State College Blvd., Fullerton, CA 92831, USA
2
Columbia University, New York, USA
3
Institute of Insurance Economics, University of St. Gallen, Girtannerstrasse 6, 9010 St. Gallen, Switzerland
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X. Xie et al.
Introduction Increasing occurrences of high-profile data breaches have made businesses more aware of the importance of cyber risk management, creating an exponential increase in the demand for cyber insurance coverage (Camillo 2017). The insurance industry’s reaction to this demand has received significant attention from academia and the industry itself. Current research on cyber insurance focuses on the supply-side aspects of insurability, such as theoretical modelling of cyber risks (e.g. Shetty et al. 2010), pricing of cyber risks (e.g. Toregas and Zahn 2014) and the efficacy of cyber insurance in improving network security (e.g. Kesan et al. 2005). It is generally agreed that cyber risk is perceived to be high risk due to high information asymmetry, lack of actuarial data and its potential for catastrophic losses. Yet, cyber insurance is expected to be one of the leading growth areas in the U.S. property-casualty (P&C) insurance industry (AM Best 2017a). Despite the great growth potential, insurance carriers have diverse opinions on participation in the cyber market. Warren Buffett, for instance, believes that the risk is unknown and does not want his company to heavily involve itself in cybersecu
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