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Aon Introduces Single-Parent Captive Cyber Insurance Program

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With cyberattack listed as one of their top risks, organizations are looking for ways to mitigate their risk in a market where cyber insurance rates are quickly rising. According to the Center for Strategic and International Studies, the annual cost of cyber crime and economic espionage to the world economy runs as high as 5 billion, or about 1% of global income.

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This does not include intangible damage to an organization, however. Companies are purchasing more insurance to cover the risk. In 2014, the report said, the insurance industry took in $2.5 billion in premiums on policies to protect companies from losses resulting from hacks.

As a result, captive insurers are being used more and more for coverage.

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Aon said it is addressing shortcomings in traditional cyber coverage with a cyber captive program with capacity of up to $400 million. Companies looking to form a captive would undergo a review to quantify their cyber exposures.

According to Peter Mullen, CEO of Aon Captive and Insurance Management, the program is designed to help clients understand their risk profile. “Once this is understood, they are is in a better position to make decisions about how much risk to retain in their captive and how much risk to transfer to the program,” Mullen said.
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 “The program allows captives to purchase coverage up to $400 million on a reinsurance or excess insurance basis.”

The cyber captive program will be domiciled in Bermuda and is available to single-parent captives. The basis for coverage will be “a very broad form which includes coverage for property damage and business interruption following a cyber event,” he added.

“Building a large tower of limits can be hampered by differing policy terms and conditions and dislocation of rates at different layers in a program,” Mullen said. “Additionally, many organizations facing cyber risks that can result in physical impacts, such as property damage and business interruption, agree that a more comprehensive approach to cyber risk is needed.

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Travelers Must Cover Inadvertent Data Disclosures, Court Rules

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A recent Fourth Circuit case affirmed a Virginia district court ruling that insurer Travelers Indemnity Company of America had a duty to defend a class action brought against its insured, Portal Healthcare Solutions, LLC, under a cyber liability insurance policy providing coverage for the electronic publication of certain materials. Portal Healthcare provided “electronic storage and maintenance of certain medical records” as a service to its healthcare provider clients.

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The class action suit alleged that Portal Healthcare negligently failed to provide services when a wrong security setting on a web access portal was selected, allowing internet search engines to scoop up not only the login page as a search result, but also the underlying sub-pages containing medical records.

Travelers argued that it had neither a duty to defend nor indemnify under the 2012 and 2013 policies acquired by Portal Healthcare. The 2012 policy included a “Web Xtend Liability Endorsement” applicable to coverage for “Personal Injury, Advertising Injury and Web Site Injury Liability.” The 2013 Policy contained a Commercial General Liability Coverage Form applicable to “Personal and Advertising Injury Liability.” The applicable definitions included:

  • “Advertising injury” means injury, arising out of one or more of the following offenses: … electronic publication of material that … gives unreasonable publicity to a person’s private life
  • “Personal injury” means injury, other than “bodily injury,” arising out of one or more of the following offenses: … electronic publication of material that … gives unreasonable publicity to a person’s private life
  • “Web site injury” means injury, other than “personal injury” or “advertising injury” arising out of one or more of the following offenses: … electronic publication of material that … gives unreasonable publicity to a person’s private life …”

Travelers asserted that it owed a duty to defend Portal Healthcare only if the underlying class action complaint alleged “(1) injury arising out of the offense of “electronic publication of material that … gives unreasonable publicity to a person’s private life” (2012 Policy) or (2) injury caused by the offense of “electronic publication of material that … discloses information about a person’s private life” (2013 Policy).”

The Fourth Circuit, however, held that the Eastern District Court of Virginia correctly analyzed the matter under the “Eight Corners” rule, where the court must look first to the four corners of the contract (the insurance policy) and then the four corners of the complaint. The policy provided coverage for “publication” of electronic materials which either gave “unreasonable publicity” to or “disclosed” information about an individual’s private life.

Travelers argued that there could not be “publication” when the insured’s business was the protection of information and there was no evidence that a third party actually viewed the information.

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The District Court determined in the first instance that “publication” does not refer to intent (whether intentionally or unintentionally disclosed) so that argument was rejected. As to the second element, the court noted that publication occurs when placed “before the public,” without reference to whether the public actually reads the information.

Under the second requirement for coverage, Travelers maintained that “publicity” required a proactive step to “attract” interest, and “disclosure” requires a third party to actually view. The District Court held that publicity was unreasonable due to the nature of the sensitive information contained in the medical records and there was no requirement that the insured take overt action to attract attention to the information.

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As to the “disclosure” argument, the District Court held that disclosure occurred when the possibility of viewing by a third party happened, not when or if a third party actually viewed the information.

The District Court also addressed the fact that there was no express exclusion of the actual security failure involved and at a minimum the insurance carrier would have to defend (although it could still later argue it had no duty to indemnify) based on the law that such an ambiguity is decided in favor of the insured.

This makes it clear that it is critical to pay attention to the type of coverage purchased and to the fine print. It may also be helpful to have an insurance agent review the types of coverage you have, to look for gaps based on your business and possible risks, since each policy type includes those risks which are intentionally covered and others which are expressly excluded. Although the types of policies continue to expand to cover new technologies and new risks, depending on the carrier and the policy’s exclusion language, the coverage may not be what you think it is.

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.”

Tom Ridge Tells Cyber Conference Insurance Should Incentivize Risk and Resilience Planning

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More Americans worry about being hacked than they are of mugging, burglary, sexual assault, murder, or physical harm of a child, according to a new Gallup poll. While hacking concerns did increase with household income, they impacted a majority of Americans in every income and age bracket, while no other form of violent crime surpassed 45% of those polled.

A new survey from Advisen and Zurich found that this fear is nearly universal for companies as well. Across industries, 88% of businesses view cyber as at least a moderate risk – up to 93% among larger businesses and 81% among small. Despite this widespread recognition, however, fewer businesses have a breach response in place than just a year ago. In 2014, only 62% have a response place – a 10% decrease from 2013. Yet 66% now use cloud services, presenting a 20% jump from last year.

“Clearly, security concerns are being outweighed by the benefits of technology,” said Erica Davis, Zurich vice president and assistant national manager for E&O, while presenting the findings on Tuesday at Advisen’s Cyber Risk Insights Conference.

Throughout the conference, consensus was clear: the 69% of Americans and 88% of businesses are on the right track, as their fears are well-founded. “There are two types of banks today: those that have been breached, and those that will,” Roc Starks, senior vice president and director of corporate insurance at Citizens Bank, said at one of the day’s panels. “First response is the critical difference in how banks and customers will fare.”

Keynote speaker and former Director of Homeland Security Tom Ridge (now of Ridge Insurance Solutions) shared this outlook on cybersecurity across industries. “There are going to be breaches,” he said. “Resilient companies are the ones that are prepared to respond.”

Yet breach response without risk management and an eye toward mitigation is no longer sufficient. “Those prepared to organize around risk and resilience are those that will withstand and lead,” he added. “By the time we get here next year, the risks will be different – the digital sun will never set.”

The landscape of cyberrisk and hacking schemes is constantly evolving, and changing at a scale and speed unlike anything seen before, Ridge said. For attendees, there was little doubt about this insight, as panelists throughout the day detailed new phishing schemes seen, top areas of emerging vulnerability, and the myriad breaches they or their industry colleagues have navigated. More companies are investigating the most useful forms of coverage for their unique exposures and exploring what management structures and risk owners are most effective to monitor and mitigate cyber. The recognition is there, and so are some of the solutions, but the insurance landscape must still evolve, as must the strategies. “We’ve seen a mind-shift,” Ridge said. “CEOs get it, but they do not know what to do and who the threats come from.”

To that end, there is more the industry can do to help. Ridge lauded the idea of “intelligent insurance,” arguing that, in addition to devoting greater resources to investigating cyber threats, the insurance industry should turn its attention to incentivizing companies to manage cyberrisk more effectively.

Much as in insurance disciplines like kidnap and ransom, some of the greatest benefits of insuring cyberrisk may come from the processes of evaluation and contingency planning. According to Ridge and other conference speakers, finding out how to oversee and incentivize those processes may be the next adaptation for cybersecurity insurers.