Growth Opportunities in Cyber Insurance

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Cyber Product Opportunity

Cyber Growth Strategy - Background
Situation: Cyber insurance products present a current, high profile opportunity for P&C insurers. Premiums
are growing at 30+% and, with combined ratios below 75%, the line has been very profitable for
carriers overall. “QA Client”* was an early entrant into the cyber market, has a long track record,
strong brand reputation, and a sizable, profitable book of business.
Complication: Cyber has become a CEO “priority”: recently communicating desires and expectations for growth
in the line internally and externally to customers, agents, brokers, investors, and the media.
However, QA Client ranks number 6 in the market and has been growing at about 1/3rd of the
industry rate.
Additionally, a potential acquisition has presented itself as another carrier is “up for sale.”
1. How do we “jumpstart” growth in the cyber line without sacrificing profitability:
 Pursue acquisition?
 Core, organic growth?
 Both?
2. Can we develop a strategy to be the #1 or #2 player without exposing the overall company
(and our surplus) to undue and potentially disastrous exposure?
Yes, we can achieve these aspirations:
➢ Pending further due diligence, the acquisition candidate may be an attractive,
complementary fit given some re-underwriting of existing book and careful integration into
QA Client’s core operations, processes, philosophy and culture
➢ The healthy core business can be strategically expanded while safeguarding loss ratios by:
leveraging our package product strength; enhancing core product features; strengthening
the depth of our service offering; and keenly focusing on trusted, long-standing customer
and market segments we know and underwrite well.
* Disguised client name for this presentation.
Client Sponsor
And QA
Hypothesis:
Questions:

• Gain a high-level understanding
of the market using internal and
secondary data as well as
management
knowledge/perspectives/
opinions to “inform” and
structure brainstorm discussion
Pre-Work Management Input Core Analytics Options Assessment Execution “Roadmap”
A Fact-Based, Analytical Strategic Growth Approach –
Tailored to QA Client Cyber Opportunity
• 3rd party research
• Management interviews
• Existing (or readily accessible)
internal client data
• Leverage institutional, internal
knowledge
• Assess and understand widest
range of options
• Understand potential pockets of
organizational “resistance”
• Full day session on-site or off-
site “safe haven”
• All relevant managers and
stakeholders
• Gain an objective, unbiased
view of market (e.g. costs,
customers, competitors)
• Apply tested analytical tools
and modalities to rigorously
inform decision-making
• Primary research (surveys,
interviews, external experts)
• QA network, online sources,
expert panels (if nec.), client
referrals/recommendations,
etc.
• Analyze/evaluate sensitivities,
alternatives, “what-ifs”
• Maximize ROI, minimize risk,
and align with
existing/potential
organizational capabilities
• QA market model
• Primary and secondary
research inputs
• Iterative management
reaction and analytical
“course corrects”
• Have a detailed plan, roadmap,
and “playbook” that is in
widespread agreement and
aligned with organizational
capabilities, overall strategy,
and financial objectives
• QA Execution Framework
(QAEF™)
• Management iterations, “buy-
in” prewires and debriefings

Total Cost of Cyber Crime in the US Rising Rapidly
According to the FBI and
industry sources, the pure
financial cost of Cyber Crime in
the US approached almost
$10bn in 2016
All-in costs are estimated at
$230bn in the US and $450bn
globally.
Additional (hidden) costs arise
from:
Uncovered business interruption
Hardware replacement
Software re-code
Loss of intellectual property
Enhanced cybersecurity measures
Brand damage
Forecasts vary, but reasonable
estimates suggest 25-30% per
annum increases by 2020
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
$10.0
2011 2012 2013 2014 2015 2016
BillionsofDollars
Total Financial Cost of Cyber Crime
CAGR: 21%
Source: FBI; Betterly Report 2016/2017; PwC; AON; Marsh; “Hiscox Cyber Readiness Report 2017”
< Pre-Work: Situation/Opportunity Assessment >

Cyber Crime is Top of Mind for Risk Managers
$0.4
$1.3
$7.6
$0.3
$1.3
$7.7
$0.3
$1.6
$9.5
$0.0
$1.0
$2.0
$3.0
$4.0
$5.0
$6.0
$7.0
$8.0
$9.0
$10.0
Small
(Revnues <$100m)
Medium
(Revnues $100m-
$1bn)
Large
(Revnues >$1bn)
MillionsofDollars
Mean Cost of Cyber Attacks by Company Size
2014 2015 2016
Source: Heritage Foundation; Ponemon Institute “2015/2016 Cost of Cyber Crime” surveys; QA web and literature search
Major Cyber Attacks in the News Mean Cost of Cyber Attacks by Company Size
• Average breach is up, especially in middle and large markets
• Large enterprise (LE) segment skewed by a few, extreme
severity events

Cyber Insurance Market - Premium* Growth
Source: A.M. Bests; AON; QA Market Sizing Model
$0.4 $0.5
$0.7 $0.7
$1.0
$1.3
$0.4
$0.6
$0.7
$1.1
$1.2
$1.6
$0.0
$0.5
$1.0
$1.5
$2.0
$2.5
$3.0
2011 2012 2013 2014 2015 2016
P&C Cyber Insurance Premium
(Standalone, Package, SIRs and E&S)
DWP "Additional" Premium*
CAGR: 31%
* “Additional” Premium includes self insured retentions (SIRs) and non-admitted excess and surplus lines volumes
Premium growth in the cyber line has been explosive attracting many new entrants
(~140 carriers in 2016).
BillionsofDollars

The Cyber Insurance Market Landscape
Market Observations
➢ Dominant market leader
experiencing below-market
growth
➢ QA Client #6 by relative market
share
➢ Two of our next largest
competitors have been
doubling and tripling their
growth year-over-year
➢ The potential acquisition
candidate is the 3rd largest in
the market and growing slightly
above market
- A simple combination would make
us #2 in the market and within
“earshot” of market leader-50%
-25%
0%
25%
50%
75%
100%
GrowthRate*
Relative Market Share *
Market Map
Market
Leader
Potential
Acquisition
QA Client
197%
298%
Competitor BCompetitor D
Competitor E
Competitor F
Competitor I
Competitor G
Competitor H
Competitor J
Competitor K
Low High
Reference
$50mm
DPW
* Axes divided at market growth rate and average RMS
Cyber Insurance “Market Map”
Source:

Privileged and Confidential
Cyber Opportunity SWOT Analysis – QA Client
Source: Management Interviews; QA Pre-Project Planning Process™
Initial observations indicate the QA Client’s existing product (SME/Pkg.) is not “broken”;
there is significant opportunity for growth within the core without an acquisition.

Privileged and Confidential
Growing from the Core – Cyber Growth Options
Considerations for Cyber Brainstorm
Core
New Product
Features
New
Customer
Segments
New
Distribution
New
Underwriting
Approaches
New Product
Attributes
New
Geographies
• Industries
• Enterprise Size (EEs,
Revenue, Cost of Risk)
• Classification (e.g. Public,
Private, NFP)
• Agent vs. Brokerage
• Direct/Online
• New technology/InsurTech
• Use of “Big Data”
• Stacking limits
• Reinsurance options
• Standalone vs. package
• Non-admitted/E&S/Wholesale
• Large dollar deductibles
• BOP/Micro enhancements
and variants
• International (where?)
• Regional
• Tech sectors/partners
• Loss prevention (cyber security advisory)
• Claims handling expertise/specialists
• Legal/defense specialists (tech/cyber)
• Online tips/assistance/community/social
media linkage
Decision
Option For Each Strategic Initiative:
Build (Hard)
Buy (Risky)
< Management Brainstorm >

Cyber Market – Customer Landscape
Market
Segment
Characteristics
SME
• Largest segment
• Slightly above industry
average loss ratios
• Huge need (high
exposure/”fear factor”‡)
LE
• Large segment
• Below industry average
loss ratios
• Moderate need (many
already have coverage)
Jumbo
• Small segment (based on
DWPs and SIRs)
• High need
(exposure/awareness)
• Very attractive loss ratios
(high SA product uptake)
Small
• Sizable segment
• High loss ratios (SA/Pkg.
product mix)
• Low “perceived” need
Micro
• Smallest segment (large
number of enterprises but
little premium)
• Worst loss ratios (almost all
Pkg./BOP)
• Low “perceived” need (and
thus willingness to spend)
-
100
200
300
400
500
600
700
800
44% 46% 48% 50% 52% 54%
SegmentNeedIndex**
Segment Loss Ratio***
Market Segment* Opportunity Matrix
SME
LE
Jumbo
Small
Micro
Source: QA Primary Market Research (Online and Phone Interviews – n=129); QA Market Sizing Model; A.M. Bests; PwC; AON; Marsh
* Segment Size Key:
➢ Jumbo: 1,000+ EEs; >$5bn Revenue
➢ Large Enterprise (LE): 501-1,000 EEs; $1-$5bn Revenue
➢ Small-Medium Enterprise (SME): 101-500 EEs; $10mm-$1bn Revenue
➢ Small: 11-100 EEs; $5mm-$10mm Revenue
➢ Micro: <10 EEs; <$5mm Revenue
** “Segment Need Index” is a combination of average exposure and stated market need/likelihood to purchase (or
renew) cyber insurance from QA primary market research surveys 2016. The index average for the sample is 350.
*** Loss ratios: A.M. Bests; PwC; AON; QA primary market research surveys 2016; Client data/experience
DWP
Potential
$1bn
< Results from Primary Research to Inform Strategic Decisions >
‡ “Fear Factor” reflects Risk Manager responses to the question:
“What keeps you up at night?” experience

Cyber Market Product Mix and Profitability
56.1
53.352.0
45.0
0
10
20
30
40
50
60
2015 2016
LossandLAE
Chart Title
0%
20%
40%
60%
80%
100%
Micro Small SME LE Jumbo
PercentofDWPPurchased/Written
Cyber Insurance Product Type
Pkg/BOP Pkg/CMP Standalone Pkg/CMP Standalone
There is a clear opportunity to “dominate” the package product segment, but we must
have a plan to protect against higher industry loss ratios in the segment.
Source: QA Market Sizing Model; A.M. Bests; PwC; AON; Marsh; QA Analysis
Key Strategy Takeaways for QA Client:
➢ Continue to focus on and expand our relatively more profitable package business
➢ Focus on the SME/LE market
➢ Focus on and cross sell to industries/customers/risks we know well (L/R mitigation)

Average Severity is Driving Rising Loss Ratios
$58.10
$60.53
$65.05
$73.75
$40 $50 $60 $70 $80
2013
2014
2015
2016
Millions of Dollars per Claim
Maximum Surveyed Cyber Crime Cost
+4%
+8%
+13%
Severity Drives Loss Ratios
If we focus on PKG business, we must
1. Underwrite who/what we know (cross sell into our book where we have
CMP/E&O history/experience)
2. Leverage agent relationships (incentives/commission levers only if necessary)
3. Acquire and develop even more U/W, Claims, LP and Legal expertise (people)
4. Aggressively but prudently employ reinsurance (especially facultative with LT,
trusted reinsurance partners)
Source: QA Primary Market Research (Online and Phone Interviews – n=129); QA Market Sizing Model; A.M. Bests; AON

QA Survey Results: Customer Needs Assessment
0% 25% 50% 75%
Cyber-Related BI
Cyber Extortion
Reg Fines/Penalties
Funds Transfer Fraud
Contingent BI
Data Restoration
Internet Media Liability
Bodily Injury/
Property Damage
Other
Features Sought by New/Renewal
0%
10%
20%
30%
40%
50%
PercentofNewCyberPurchases(2016)
New Cyber Purchases by Industry
Source: QA Primary Market Research (Online and Phone Interviews – n=129); PartnerRe; Advisen
QA Client Industry Strength*
* Based on E&O, GL, CMP penetration of segment
QA surveys of risk managers indicate price, breadth of coverage, and desire for higher limits
(without ‘stacking’) are the key current customer purchase criteria; however, NEW buyers
vary by industry type and product features desired.
Features Sought by New/Renewal Buyers
We can
provide many
of these
features

Potential Acquisition Looks Promising
Core
New Product
Features
New
Customer
Segments
New
Distribution
New
Underwriting
Approaches
New Product
Attributes
New
Geographies
Positives
Number 3 carrier by DWP; catapults QA Client
to #2 and within reach of slow growing market
leader without organic growth initiatives
Strong in Large Enterprise (LE) Market
Industry-noted expertise (people), especially
in:
Underwriting
Legal/Defense specialists
Loss prevention (cyber specialists)
Strong broker relationships
Large Market customer relationships
Negatives
Jumbo account exposure (potential severity
risk) – can be mitigated by “re-underwriting”
jumbo book
Reputation for being stingy/difficult in paying
claims
Slightly worse than industry loss experience –
can be mitigated by elimination of jumbo
accounts (if they cannot be re-priced) and
more assiduous claims protocols/standards of
QA Client
Source: QA & Client Management Target Due Diligence
After thorough review of due diligence and market feedback, the available book for acquisition looked
attractive based on financial performance (combined ratios and premium mix/growth) as well as
complementary “fit” with the QA Client core:
• Legal/Defense
specialists
• Strong LE
market
presence
• Wholesale/
E&S
• Strong Broker
Relationships
• MGAs
(Wholesale)
• Standalone
Cyber Product
• E&S/Wholesale
(non-admitted)
• International
Target Pros & Cons
(Bold Green Indicates Current QA Client Weakness) What Target Would Add to QA Client Current Core Offering
< Results from Primary Research >

Cyber Strategy Articulation, Plan and Tactics
Organic Core
Growth
Acquired Growth
Beyond the Core
< Results – Strategy, Actions, Tactics >

Results: QA Client Success in Market Share and Premium Growth
$0
$50
$100
$150
$200
$250
$300
2016 DWP Acquisition*** Core Package
Expansion**
Product
Enhancement*
2017F DWP
DWP-MillionsofDollars
Predicted and Actual† Premium Growth
$269mm
+ $26mm
+ $49mm
+ $125mm
$68mm
† 2017 Actual based on forecast through 3rd quarter 2017
0%
10%
20%
30%
40%
50%
60%
70%
80%
2016 2017F
PercentofTotalPackageandStandaloneDWP
Market Share of Top 10 Carriers
QA Client
QA Client
Market
Leader
Market
Leader
2016 #2
Player
2016 #2
Player
Acq.
Target
Other Top 10 Carrier
* Expand relationships in attractive core customer segments (esp. HC, Fin Insts, Non-Profit); cross sell to existing
customers with long-term CMP and E&O relationships; higher limits for these "preferred" customers; new facultative
reinsurance partnership
** Addition of cyber-related BI cover, cyber extortion, and limited regulatory fines features; enhanced claims and
L&P talent training; revamped customer/broker portal; legal/defense "specialists" partnerships
*** Less disposition of high-exposure (severity) "Jumbo" accounts (assumes 0% retention upon planned rate increases)
Pursuing this strategy can achieve desired management objectives through three quantifiable
and executable steps
< Results – Strategy, Actions, Tactics >
QA Client
Base
QA Client
Target

Strategy Development – Always Unique...But Common Themes
The Best Strategies Share 4 Characteristics
They Are:
“Cookie-cutter”
approaches normally fall
short
The simplest solution is
often the correct one.
Take into account core
competencies, culture,
people
Incomprehensible or
inconsistent with corporate
mission/values fail.

Growth Opportunities in Cyber Insurance

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