Cyber Insurance Supply and Performance: An Analysis of the U.S. Cyber Insurance Market

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, are in line with the coordinated risk management hypothesis, but only partially support the business growth constraint hypothesis. We find that insurers offer cyber insurance to capitalize on their competitive advantage in understanding and pricing cyber risks and to balance their risks between investment and underwriting. We find limited evidence that insurers participate in cyber insurance to compensate for constraints on business growth. In addition, the type of coverage offered (standalone or packaged) and the 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, emphasizing the significance of cyber insurance policy design.