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Cyber Insurance Purchasing Up, But Breaches Felt in Prices and Limits

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NEW YORK—At yesterday’s Advisen Cyber Insights Conference, Zurich and Advisen released the fifth annual Advisen Cyber Survey of U.S. risk managers, finding a 9% acceleration in cyber liability insurance purchasing from 2014 to 2015. The firm has seen a 26% increase in the number of respondents who have coverage since the first survey in 2011.

Companies are taking cyberliability more seriously, Zurich reports, with the number of organizations developing data breach response plans up 10% from last year. What’s more, companies appear to be better recognizing the sheer amount of value at risk, with two-thirds of respondents saying they have either increased their policy limits or are considering doing so. While Zurich found that more organizations view information security as an organizational challenge rather than the purview of the IT department alone, and respondents said that boards and executive management are taking cyberrisk more seriously, those who have not yet obtained cyber coverage say it is because their superiors still do not see the need. There is also still a considerable difference in take-up rates among large corporations and small and mid-sized businesses, with Catherine Mulligan, senior vice president and national underwriting manager of specialty E&O, telling the audience there is an approximate 20-point spread between the groups.

“This year’s cyber survey shows that demand for coverage and higher limits has increased tremendously and we at Zurich have seen double digit growth year over year,” said Bryan Salvatore, president of specialty products for Zurich North America. “That is why we are heavily invested in identifying risks and delivering solutions and why we are committed to staying at the forefront of this issue.”

Marsh has also seen considerable growth in cyber liability insurance purchasing among its clients. According to the insurer’s new midyear cyber benchmarking report, the number of U.S.-based Marsh clients purchasing standalone cyber insurance increased 32% in the first half of 2015, up from 26% growth during this period in 2014. By sector, members of the education industry made up the biggest growth, with 155% more clients purchasing the coverage, followed by power and utilities with a 100% increase and manufacturing with a 76% increase. The healthcare sector remains Marsh’s largest buyer of cyber coverage, with 41% of all clients in this industry purchasing it by the end of the first half of 2015.

Cyber liability insurance growth rates

Sessions throughout the conference made clear that insurers—and the industry at large—are still struggling with what is also risk managers’ biggest challenge: data. Completely evaluating the true value at risk with cyber liability continues to elude both sides, although many new approaches and consultancy services are emerging. Further, the dearth of actuarial data not only compounds the challenges of the cyberrisk assessment process, but make it hard for the industry to set pricing and limits with confidence.

“It is hard for insurers to be prudent with cyber as risk managers often do not fully understand how to measure their exposure,” Mulligan said.

“Actuarial data is the Holy Grail of the cyberinsurance market: we’re all searching for it and it’s just not there,” said Bob Parisi, cyber product leader at Marsh, who moderated a session on the struggle to quantify and model cyberrisk.

In addition to the actuarial uncertainty, the considerable number of large losses over the past few years is continuing to push up the cost of cyber, forming what Willis executive vice president Peter Foster described as a “hot” market that will have to cool and solidify with time. Parisi chose to describe the market as “brittle” after absorbing several hundred million dollars in losses, and a range of insurers and brokers reported that premiums have increased dramatically as a result. The Marsh study found that price increases across industries averaged 19%, with 32% increases among retailers, the most frequently breached sector over the past few years.

cyber insurance limits purchased

While these breaches and better estimates of the real cost of cyber incidents have helped many companies realize they may be underinsuring for cyber liability, the move to correct this is getting more difficult. Insurers have said repeatedly that there is plenty of capacity in the cyberinsurance market and many buyers have increased the limits purchased, but higher limits of liability are increasingly hard to come by, and none really exist in excess of $100 million. Particularly for businesses that have yet to implement serious efforts to address information security, rate increases appear sure to continue, and simply buying more coverage will not only be unsustainable, but may not even be possible as insurers give more thought to the capacity they are willing to commit to these risks.

“There is just not enough capacity to extend $50 to $100 million limits to every account,” said Greg Vernaci, AIG’s head of cyber in the United States and Canada. “We are looking to reward those companies with a robust information security posture who go beyond and take a multifaceted approach to managing cyberrisk.”

The Evolving Cyberrisk Landscape and the Insurance Industry

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Cyberrisk

Rapidly developing computer technologies and the unrelenting evolution of cyberrisks present one of the biggest challenges to the (re)insurance sector today. Liabilities from cyberattacks and threats to the data security of cloud computing and social media have become key emerging risks for carriers. The unprecedented rise in cyberattacks, in addition to the threat cyberrisk poses to global supply chains, has seen the cyberinsurance market grow significantly in recent years.

Client demand for cyber coverage has been growing, on average, 30% annually in the United States over the past several years, according to Marsh. While demand varies by industry, the one constant has been that more clients are investigating and analyzing existing traditional insurance coverage and whether they need standalone cyberrisk insurance coverage.

Because cyberrisk is associated with the use of technology and the handling of all data and information, the threat transcends a company’s information technology (IT) department as well as what is confined to the internet. To help overcome some misconceptions that still exist for cyberrisks, some clarity around business exposures is needed to understand the scope of the threat.

Cyberattacks pose a danger to global supply chains

Cyberrisks are not isolated and are usually connected to other risks. Many companies that are exposed to cyberrisks are, for example, also exposed in turn to risks to their supply chain. Due to technological innovation and advances, many parts of a company’s or industry’s supply chain have become interconnected and automated.

Most commercial entities today are exposed to these risks as a growing number of businesses become more interconnected globally. A single cyberattack has the potential to put an entire company’s supply chain at risk. Therefore, cybersecurity and supply chain risk management must be considered in conjunction with one another.

There are a range of risks when it comes to online/computer security. Cyberattacks can result in first party liability, including business interruption, computer security breaches, privacy breaches of confidential information and even third-party liability losses. Technology failures have begun to outpace adverse weather, fire and social unrest as the major force in disrupting a corporate supply chain, according to a recent Guy Carpenter report.

Everyone is at risk – individuals, companies and governments

In 2014, cyber issues have become more of a concern for companies that once felt they had relatively little exposure. In fact, cyberattacks were ranked fifth among the top five global risks in terms of likelihood in this year’s World Economic Forum’s annual Global Risks 2014 report.

Governments consider cyberattacks to be among the most serious economic and national security challenges now facing them. And through the ubiquitous use of the internet, mobile devices and social media, companies of all sizes and in all nations are now finding themselves at risk of falling prey to the full range of cyber perils. Such attacks can run from hackers shutting down a company’s network, gaining access to customers’ and employees’ personal and financial information, to the theft of business trade secrets.

More data laws and regulations in place

High-profile data breaches and other cybersecurity incidents have become more commonplace with increasingly onerous outcomes. Target, one of the largest retailers in the United States, suffered a massive cyberbreach late last year which involved the theft of approximately 40 million credit and debit card account details as well as personal data of nearly 70 million customers. The breach reportedly occurred when hackers used the retailer’s heating and cooling vendor’s system to navigate their way into the retailer’s records. The resulting publicity cost the company a significant amount in lost sales, loss of reputation, class action lawsuits, and may have contributed to the ouster of the chief executive officer. And most recently, a U.S.-based online auction site announced that hackers accessed the company’s 145 million user accounts and urged customers to change their passwords.

More recently, home improvement chain Home Depot became the victim of another credit card data breach and the FBI is reportedly investigating cyberattacks at some of the largest banks in the United States.

As cyber incidents affect both consumers and institutions, governments everywhere are putting more data privacy laws and regulations in place in regard to disclosure and other related safeguards. In the United States, there are laws that require the protection of both personal financial and health information. Last year, the U.S. Securities and Exchange Commission, which oversees publicly-traded companies, adopted a directive requiring certain regulated financial institutions and creditors to adopt and implement identity theft programs in light of the new cyber threats.

Risk mitigation and insurance

With governments considering and enacting new laws in response to the rising number of cyber events, companies, especially those in the United States, are taking a closer look at cyberrisk mitigation, including insurance coverage of breaches and attacks.

Media reports of serious data breaches have prompted more companies to buy cyber coverage of $100 million or more compared to the prior year, Marsh said in its March 2014 report Benchmarking Trends: Interest in Cyber Insurance Continues to Climb.

Traditional insurance products often do not cover risks that cover damages resulting from an incident like a computer breach.

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As such, specific cyber liability insurance may be necessary.

The very process of applying for cyberrisk insurance is a constructive exercise for raising awareness and identifying potential vulnerabilities.

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By engaging in that process, a company can perform a review of information security protocols with respect to access control, physical security, incident response and business continuity planning.

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As a result, businesses and other institutions are finding that cyberinsurance products have been broadened to include coverage that now addresses nearly all aspects of technology-based risk faced by today’s companies. Carriers have been adapting their policies to include a variety of loss prevention and risk mitigation tools, ranging from turnkey breach response teams to pre-emptive risk analytics.

As cyberthreats become more severe, more frequent, and continue to change along with technological advances, the (re)insurance industry will continue to stay one step ahead by creating new forms of cyberrisk coverage to meet the needs of their clients.

Insuring Against Third-Party Cyberrisk

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The tremendous growth in cyber insurance is being fueled in part by the desire of companies to cede some of the risk of a cyber breach to insurers.

  In many cases insurers are eager to take on this risk—provided they can objectively quantify and understand the risks they are underwriting.

However, is it enough to only look at the cyber risk of the insured?  Increasingly companies are being attacked through their third-party vendor networks; one study by the Ponemon Institute reported 23% of data breaches are attributable to third party vendors. As companies share critical customer information with vendors, they expose themselves to a breach through these extended networks. Criminals have even started to target small to medium sized companies as a way to access the sensitive information of the larger firms they serve.

One case of this new tactic is documented in a recent New York Times article in which a mischievous attack was perpetrated by inserting malware into a Chinese take-out menu favored by employees of the targeted company. Last December, when Target Corp was breached and hackers stole credit card data for 70 million customers, the attack was traced to malicious code getting into Target’s network through a heating and air conditioning vendor.

For an insurer, these risks are very real and pose a potential blind spot in the risk assessment process.  When a breach occurs through a third-party vendor and involves the loss of sensitive data on behalf of a customer, the financial and reputational damage that ensues falls primarily on the owner of the data—and their insurer. While insurers today are grappling with the task of evaluating the cyber risk of the insured themselves, often there is little thought given to the cyber security of the insured’s third-party vendors.

Some underwriters are asking prospective clients to list their critical vendors in policy applications, but this is primarily to identify areas of risk aggregation—where a large percentage of insureds are all relying on the same set of vendors.

 Identifying risk aggregation is an important part of overall risk assessment, however simply enumerating critical vendors and identifying potential aggregation issues fails to identify whether those vendors are secure.

In order for underwriters to overcome this obstacle, objective cyber risk metrics can be used to both assess the insured AND their critical vendors. Ratings can be a valuable tool in identifying problem areas within an insured party’s internal network and extended ecosystem. Identifying and mitigating these problems before a breach occurs can help both client and insurer avoid costly monetary losses and damage to their reputation.

Cyber Crime: Recent Events and Insuring Against It

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It seems like several times per day that I am sent a news alert of yet another data breach.

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The frequency with which they occur is frightening to say the least and unfortunately, many businesses are not covered for such an event.

Let’s take a look at data breaches that have occurred over the past week and what, if anything, can be done to prevent (or insure against) them.

  • A report by Wake Forest Baptist Medical Center to the state attorney general’s office explained that 357 people were affected by documents from an 11-year period taken from the medical center due to a security breach, the Winston-Salem Journal is reporting. Wake Forest Baptist issued a statement early last month that it had fired an employee, Linda Bowden Turner, who had taken medical records and documents from 1995 to 2006 from the medical center to her own properties.
  • If you used a credit or debit card at Margarita’s restaurant over the past three months, a virus might have culled your information before it could be encrypted and then sold to underground markets, Huntsville police said. At least 200 people over the past two weeks have reported incidents of stolen bank account information, and authorities said they suspect there are many more cases that have not been reported and many potential victims whose numbers have not yet been used by thieves.
  • Nearly 700 Toshiba customers’ emails and passwords have been stolen from the company’s U.S. servers, the latest company to be hit by hackers, although it doesn’t appear to be the work of the same groups that have infiltrated Arizona law enforcement, Orlando tourism or PBS. TechEYE.net reported that the hacker VOiD targeted Toshiba and claimed “to gain usernames and passwords on 450 of the company’s customers” as well as about 20 re-sellers and 12 administrators on the company’s Electronic Components and Semiconductors and Consumer Products sites.
  • Lady Gaga has called in police after thousands of her fans’ personal details were stolen from her website. Her record label acted after the site was hacked into by US cyber attackers SwagSec. A source said: “She’s upset and hopes police get to the bottom of how this was allowed to happen.” The group struck on June 27 but did not make the information, which included names and email addresses, public until this week.
  • Anonymous, a group of “hacktivist” computer-savvy attackers, has already speared a number of big fish: credit-card companies, the church of Scientology, and Monsanto, a biotechnology firm. And the hackers have flaunted their skills by successfully attacking computer-security expert firms, like HBGary. Its latest victim is Booz Allen Hamilton, a big consulting firm to America’s government, including on cybersecurity, with bigwigs like a former CIA head and a former director of national intelligence on its payroll.

So how do companies work to prevent or mitigate the effects or data breaches? One option is cyber liability insurance. Major insurers like Chartis, ACE and Hiscox have been in the cyber liability insurance game for several years now and smaller insurers are entering the market at a rapid pace. But what types of coverage does a cyber liability policy include? According to Dave Navetta, partner at InfoLawGroup and contributor to Fox News, the following may be included:

  • Breach Notice Costs. Coverage now exists for direct costs incurred by an insured to provide notice to individuals in the event of a security breach, as well as expenses to set up a call center and provide credit monitoring services. These costs involve a multiplier effect. For example, credit monitoring can cost anywhere from $10 to $200 per year, per person impacted by a breach. If one million individuals are at issue, costs could run in the millions of dollars. These costs also include attorney fees and forensic investigation expenses to determine the cause of a breach and whether notice is required under law.
  • Damages and Defense Costs. Provides coverage for information security and privacy breaches and technology professional liability. This element of the insurance plan is specifically designed to provide coverage for damages and defense costs arising out of lawsuits or claims resulting from a data security breach or an act, error or omission in the rendering of professional technology services (like data storage services). Some cyber policies will also protect your business against the cost of regulatory investigations or actions due to a security or privacy breach.
  • Service Provider Breach.With more companies outsourcing their data processing to third parties or the “cloud,” it is important that a cyber policy provides coverage if the security breach happens to one of the insured’s service providers. That will protect your company against many types of expenses. However, these policies are unlikely to provide any coverage for the personnel hours expended internally to address the breach.
  • Crisis Management, Business Interruption and Data Restoration. This insurance can also help cover the costs for getting the network back up and running and restoring lost data. Public relations services may also be included to help restore the company’s reputation.
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  • Denial-of-Service Attack. If your company or a service provider, such as a web host, is shut down by a denial-of-service attack or other type of hack, some insurance policies will cover lost income and the costs of repairing the network.
  • Cyber Extortion. In a case where a hacker decides to hijack your website, network or database, and demands money to restore it, a cyber extortion clause in an insurance policy can help to cover the settlement and the cost of hiring a security firm to track down the hacker.

Does your company have cyber liability insurance coverage?

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