Broker Aon has flagged underwriting discipline as an emerging concern in the Australian cyber market as the pace of rate increases continues to slow significantly after two years of hardening conditions. 

Cyber premiums in Australia rose on average 3.2% in the first quarter across Aon’s portfolio with 38% of clients achieving a flat renewal and 25% of clients securing a reduction in premium for the same limit. 

“With ambitious growth targets set for 2023, compounded with the increased supply of capacity, both from existing markets and new entrants, the market is showing remarkable signs of competitive tension both on a primary and excess basis,” Aon says in a first-half market update. 

The Cyber Insurance Market Insights H1 2023 update says with improved risk selection from insurers, cyber rates have been decelerating since the start of last year and the market reached a point of equilibrium in the December quarter. 

In addition to premiums trending positively, retentions have stabilised and coverage is, on the whole, also stabilising. 

However, the softening market has thrown up new concerns around underwriting discipline as insurers look to grow their cyber books. 

“As anticipated…we are now in the midst of the 2023 ‘discipline test’ as rate softening emerges,” Aon says. 

“Whilst the market has evolved to take a more pragmatic underwriting approach…there remains a degree of speculation and fear that the influx of capacity and the shift toward a softening cycle may lead to a risky relaxation of underwriting discipline, which could conflate with a rebound in claims activity.” 

Aon says its Australian data shows cyber claims fell sharply last year after record levels in 2019, 2020 and 2021. 

Cyber claims frequency dropped 33% last year for all claims and incidents or 39% if looking at claims in isolation. 

Aon in Australia did not witness the same level of severity of claims last year as was recorded for the previous two underwriting years in 2020 and 2021.  

The trend is in contrast to what is being experienced globally where the average cost of a cyber incident has risen to an all-time high, Aon says. The cost of a data breach averaged $US4.35 million ($6.71 million) last year, up 2.6% from 2021 and 12.7% from 2020. 

While cyber rates are improving in buyers’ favour Aon cautions there will remain the “haves” and the “haves not” in the market. 

The mid-market and large corporate sectors will mostly be considered as “haves” while SME sectors, because of their frequency of loss, are at the other end of the market. 

“Security is likely to remain a critical element to procuring cyber insurance,” Aon says. 

“Whilst market conditions are improving, there is still the expectation that a two-stream market will exist for the foreseeable future.” 

Aon says the two-stream market will be defined by the security requirements insurers have of their insureds. 

“Those organisations that have aligned security to insurers’ expectations can expect to benefit more rapidly from the improving market conditions,” the broker says. 

“Those that are yet to meet insurers’ expectations can anticipate continued challenges with cyber security insurance coverage.”