Market Overview

Best's Special Report: Cyber Catastrophe Stress Test Gauges Potential Impact on Segment Leaders in a More-Developed Future Market

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A modeled single-event cyber catastrophe would generate meaningful to
significant gross losses for three of the top 20 cyber insurance
providers, ranging from 15% to 119% of these companies' estimated 2022
policyholder surplus under a stress-test scenario.

In the new Best's Special Report, "Cyber Insurance Market: Stress
Testing the Future," A.M. Best worked with Guidewire's Cyence
Risk Analytics team to extrapolate and model current cyber insurance
market trends to 2022. As part the approach, five typical policy
profiles were created, each with certain attributes such as business
revenues, specific policy limits, self-insured retentions and attachment
points.

Using two scenarios as described in a Lloyd's 2017 emerging risk report
— a cloud service provider interruption and mass vulnerability — A.M.
Best applied Guidewire's Cyence Risk Analytics application to the top 20
carriers' modeled cyber portfolios in various scenarios to model their
gross loss potential. In the first scenario, numerous cloud-based
customer servers fail, leading to widespread service and business
interruptions. In the second scenario, a common software application is
compromised and exploited on a global scale. In addition to the two
event scenarios, an assessment against both events occurring over a
12-month period found that at the 1-in-200 event level, five companies
incurred gross losses ranging from 11% to 233% of their estimated 2022
policyholder surplus.

The report notes that gross losses under the 1-in-50 and 1-in-200
scenarios do not take into consideration ceded reinsurance arrangements
to which these companies may be party; however, the analysis also does
not take into consideration companies' silent cyber exposure (i.e., when
perils are neither specifically included nor excluded), which
potentially could be significant.

"For the majority of these companies, even the gross losses do not come
close to the natural catastrophe probable maximum loss estimates used
for stressing the balance sheet strength of the companies," said Fred
Eslami, an associate director at A.M. Best. "However, under these
circumstances, a handful of companies could lose a significant amount of
surplus, which potentially could create ratings pressure or even trigger
a downgrade."

"Cyber risk inherently will span multiple functional skill domains,
requiring expertise from claims, underwriting, actuarial and enterprise
risk management, and making the process truly a team effort across an
insurer. Addressing the talent gap will be a critical aspect of risk
management," said Sridhar Manyem, director of industry research and
analytics.

Stress-testing cyber risks against a company's balance sheet to confirm
that the cyber portfolio does not pose capital stresses, and an
evaluation of risk mitigation strategies, such as selective
underwriting, reinsurance, establishing risk preferences and risk
pricing, will be key aspects of A.M. Best's review of an insurer's
approach to managing cyber risk.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=277047.

A.M. Best interacts with many insurance-related organizations, including
all major risk-modeling firms. This announcement should not be construed
as an endorsement or recommendation regarding any product or service.

A.M. Best's Fred Eslami and Sridhar Manyem, along with an expert from
Guidewire's Cyence Risk Analytics, discuss the report in a webinar,
titled, "Cyber Insurance Market: Stress Testing the Future." To view the
webinar, please visit http://www.ambest.com/v.asp?v=cyber818.

A.M. Best is a global rating agency and information provider with a
unique focus on the insurance industry. Visit
www.ambest.com
for more information
.

Copyright © 2018 by A.M. Best Rating Services, Inc. and/or its
affiliates. ALL RIGHTS RESERVED.

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