Socrates Olympios examines the immediate impacts of the pandemic on motor and cyber insurance markets, as well as how they could be affected in the longer term
As we deal with the nth wave of COVID-19, its disruption to general insurance activity has started to crystallise, and providers are starting to plan for the post-pandemic landscape. While the pandemic’s short-term impact on general insurance was significant, the lifestyle shift it prompted means the long-term impact will be equally significant across the spectrum of insurance lines – from traditional markets such as motor insurance to emerging markets such as cyber insurance.
During the pandemic we saw strict lockdown measures imposed across the globe and many people shift to a remote working environment. This naturally led to reduced traffic (by around 13.6% in the UK) and fewer accidents, meaning motor insurers generated excess profits. While some insurers in more advanced markets elected to return a portion of the profits through rebates instead of lowering premiums, companies in less advanced markets mostly retained the excess profits.
As countries begin to emerge from the pandemic, motor insurance must settle into a new normality – but what will this look like?
Emerging market trends point to a soft market for motor insurance worldwide, especially in markets where premiums are driven mainly by market forces rather than by technical pricing. Several factors will lead to this soft market.
First, in the US, digital channel adoption increased by almost 10%, a trend seen worldwide that showcases the increasing propensity for shopping around during the pandemic. This applied downward pressure to premiums. The excess capital generated through increased profits is also likely to encourage insurers to increase their market share by reducing motor premiums, leading to premium decreases in the market. Last, the shift to a remote working environment and the increasing cost of automobiles (due to chip shortages) might lead to increased use of pay-as-you-go insurance or public transport respectively, resulting in a smaller total market for conventional motor insurance.
On the claim side, the adoption of remote working by many is expected to keep claims frequency lower than pre-pandemic. However, rising inflation will inevitably affect both running expenses and claims severity, thus increasing overall claims cost. This highlights the risk faced by motor insurers: market trends are expected to put downward pressure on premiums, while the technical rate looks to be on the rise due to the greater increase in severity that will offset the reduced frequency.
The remote working model also affected the cybersecurity landscape. COVID-19 provided the perfect environment for cybercriminals: remote workers’ increased likelihood of falling for phishing scams, combined with ransomware gangs’ increasingly sophisticated techniques, led to an increase in reported ransomware attacks, which reached around triple pre-COVID-19 levels from the end of
2019 onwards. As such, companies became increasingly aware of their vulnerability to these attacks, leading to growing demand for cyber insurance. Based on the current landscape, it is no surprise the Allianz Risk Barometer found that cyber attacks top the list of Swiss firms’ worries for 2022.
The rising demand for cyber insurance is not currently matched by a proportional increase of supply on the insurance market, leading to a hard market for cyber insurance. Given that this is a highly specialised market with high barriers to entry, and that there is a lack of cybersecurity experts in the marketplace, it is expected that this hard market will persist for the time being, with companies struggling to find adequate affordable capacity to cover the required excess layers of potential large ransomware losses. Testament to the above is EQT and Vitruvian’s acquisition of one of the leading cyber managing general agents in the market, CFC, for more than 40-times the marketing EBITDA – a multiple around three times higher than insurance industry benchmarks.
Socrates Olympios is a senior manager at Deloitte Cyprus
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