Are Cyber Insurers the New Mortgage-Securities Investors? A Comparative Analysis

The Awkward Moment at the Cyber Risk Insights Conference

During Advisen’s Cyber Risk Insights 2019 conference, an awkward moment occurred when an audience member compared the practices of cyber insurers to those of mortgage-backed securities investors before the 2008 financial crisis. The panelists discussed how insurers initially sought more information than clients could provide, leading to a shift towards accepting less information. This raised concerns about insurers chasing market share without complete risk information, echoing the practices that led to the financial crisis.

Mortgages and the Financial Crisis: A Recap

In the early 2000s, obtaining a mortgage was relatively easy. Lenders bundled loans into mortgage-backed securities, assuming few borrowers would default. However, many lenders abandoned their standards, leading to risky loans being made. Regulators and rating agencies failed to scrutinize these securities adequately, leading to overconfidence among investors. When these risky loans defaulted, it triggered the Great Recession.

The Breakdown of the Analogy

Cyber insurers, unlike their mortgage counterparts, understand the risks and price their policies accordingly. A recent I.I.I./J.D. Power survey found that cost and exclusions are top reasons small companies avoid cyber coverage. Insurers have a direct stake in the policies they write and maintain customer relationships. Seventy percent of small companies that bought cyber coverage reported their insurer helps with risk mitigation, reflecting a collaborative approach to addressing cyber risks.

In conclusion, while there are superficial similarities, the practices of cyber insurers differ significantly from those that led to the financial crisis. For readers, it's crucial to understand these distinctions and the collaborative efforts insurers are making to mitigate cyber risks.