Tag Archives: cyber insurance

A Look At Cyber Risk Of Financial Institutions

Overview Of The Risk
There were more than 26 million new strains of malware released into circulation in 2011. Such a rate would produce nearly 3,000 new strains of malware an hour! Almost two-thirds of U.S. firms report that they have been the victim of cyber-security incidents or information breaches. The Privacy Rights Clearinghouse reported that since 2005, more than 534 million personal records have been compromised. In 2011, 273 breaches were reported, involving 22 million sensitive personal records. The Ponemon Group, whose Cost of Data Breach Study is widely followed every year, indicated a total cost per record of $214 in 2011, an increase of over 55% ($138) compared to the cost in 2005 when the study began.

Other surveys are consistent. NetDiligence, a company that provides network security services on behalf of insurers, reported in their “2012 Cyber Risk and Privacy Liability Forum” the results of their analysis of 153 data or privacy breach claims paid by insurance companies between 2006 and 2011. On average, the study said, payouts on claims made in the first five years total $3.7 million per breach, compared with an average of $2.4 million for claims made from 2005 through 2010.

And attacks simply don't target large companies. According to Symantec's 2010 SMB Protection report, small busineses:

  • Sustained an average loss of $188,000 per breach
  • Comprised 73% of total cyber-crime targets/victims
  • Lost confidential data in 42% of all breaches
  • Suffered direct financial losses in 40% of all breaches

Indeed, according to the 2011 Verizon Data Breach Report, in 2010, 57% of all data breaches were at companies with 11 to 100 employees. Interestingly, it was the Report's opinion that 96% of such breaches could have been prevented with appropriate controls. Bottom line: cyber attacks are here to stay — and in many ways, they are getting worse.

A Look At The Financial Institution Sector
Willy Sutton once infamously remarked that he robs bank because “that's where the money is.” According to Professor Udo Helmbrecht, the Executive Director of the European Networking and Information Security Agency, if Willy Sutton was alive today, he would rob banks online.

Criminals today can operate miles, or even oceans, away from the target. “The number and sophistication of malicious incidents have increased dramatically over the past five years and is expected to continue to grow,” according to Gordon Snow, Assistant Director of the Cyber Division of the Federal Bureau of Investigation (testifying before the House Financial Services Committee, Subcommittee on Financials Institutions and Consumer Credit). “As businesses and financial institutions continue to adopt Internet-based commerce systems, the opportunity for cybercrime increases at the retail and consumer level.” Indeed, according to Snow, the FBI is investigating 400 reported account takeover cases from bank accounts of US businesses. These cases total $255 million in fraudulent transfers and has resulted in $85 million in actual losses.

According to the FBI, there are eight cyber threats that expose both the finances and reputation of financial institutions: account takeovers, third-party payment process breaches, securities and market trading company breaches, ATM skimming breaches, mobile banking breaches, insider access, supply chain infiltration, and telecommunications network disruption.

It was telecommunications network disruption that dominated the news in 2012.

Otherwise known as a distributed denial of service attack, US banks were attacked repeatedly throughout the year by sophisticated cyber “criminals” whose attacks were eventually sourced to the nation of Iran in what would truly be considered a Cyber War attack against this country's infrastructure.

Among the institutions hit were PNC Bank, Wells Fargo, HSBC, and Citibank, among many others. Big or small, it made no difference. At the end of the day, as many as 30 US banking firms are expected to be targeted in this wave of cyber attacks, according to the security firm RSA. And it is likely that we are not at the end of the day. On January 9, 2013, the computer hacking group that has claimed responsibility for cyber attacks on PNC Bank vowed to continue trying to shut down American banking websites for at least the next six months.

That is not to say that financial situations only had to worry about distributed denial of service attacks launched by hostile nation states in 2012.

On December 13, 2012 the Financial Services Information Sharing and Analysis Center, which shares information throughout the financial sector about terrorist threats, warned the US financial services industry that a Russian cyber-gangster is preparing to rob American banks and their customers of millions of dollars. According to the computer security firm, McAfee, the cyber criminal, who calls himself the “Thief-in-Law,” already has infected hundreds of computers of unwitting American customers in preparation to steal that bank account data.

Of course not all threats look like they come from the latest 007 flick. On October 12, 2012, the Associated Press reported TD Bank had begun notifying approximately 260,000 customers from Maine to Florida that the company may been affected by a data breach. Company spokeswoman Rebecca Acevedo confirmed to the Associated Press that unencrypted data backup tapes were “misplaced in transport” in March 2012. She said the tapes contained personal information, including account information and security numbers. It is unclear why the bank waited until October to notify customers. Over 46 states now have mandatory notification laws that dictate prompt notification to bank customers of missing or stolen “Personally Identifiable Information.” Failure to make timely notification can, and often does, prompt customer lawsuits and regulatory investigations.

The bottom line: you cannot be a financial institution operating in the 21st Century and not have a cyber risk management plan which includes the purchase of cyber insurance.

The Cyber Insurance Market
With these facts, it is not surprising that the cyber insurance market has grown tremendously from its initial beginning in 2000. Starting with what was the brainchild of AIG and Lloyds of London, the market has grown to over 40 insurance providers. A widely accepted statistic is that the market now produces over $1 billion in premium to insurance carriers on a worldwide basis.

Despite the increasing claim activity, informal discussions with the market continue to indicate that cyber risk is a profitable business. Perhaps, it is for this reason, cyber premium rates are flat to down 5% according to industry reports in the market where rates in property-casualty are generally increasing.

Carriers also see this as an area where there are many non-buyers, and statistics seem to back them up. According to the “Chubb 2012 Public Company Risk Survey: Cyber,” 65% of public companies surveyed do not purchase cyber insurance, yet 63% of decision-makers are concerned about this cyber risk. A risk area with a high level of concern but little purchase of insurance is an insurance broker's dream. In a recent Zurich survey of 152 organizations, only 19% of those surveyed have bought cyber insurance despite the fact that 76% of companies surveyed expressed concern about their information security and privacy.

It is unclear why there aren't more buyers but most of the industry believes it's a lack of education. For example, previous surveys indicated that over 33% of companies incorrectly believe that cyber risk is covered under their general corporate liability policy.

It is then perhaps not surprising that the Betterley 2012 market report stated “we think this market has nowhere to go but up” Although, they quickly qualified, “as long as carriers can still write at a profit.”

Cyber Risk

Understanding your exposure to technology and implementing baseline controls should always come before you consider insuring those risks.

What is a firewall? What would I do with a privacy policy? What is encryption and why would my company need to encrypt any of our data? How would I implement an incident response plan? How many personal health records do we have in our database? Do we do background checks? Who has access to our server room? Why do I need to answer so many questions just to get a proposal for insurance?

These are the types of questions that come up during the cyber insurance application process, and this is often the first time someone outside of the IT department has had to answer them. With the growth of the cyber insurance industry, now estimated to be almost $1,000,000,000 in gross written premium for 20111, risk managers, insurance agents and boards of directors are wondering why they now also have to talk to the IT department when discussing risk management and their insurance renewal.

A vendor mistake, administrator's misconfigured firewall or even an improperly negotiated cloud contract can pose a systemic risk to your corporation.

As regulatory expectations continue to be set higher (due to increased enforcement of the Health Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and Clinical Health Act, attention of 46 different state notification laws that are enforced by State Attorney Generals, Fair and Accurate Credit Transactions Act) and consumer opinion is constantly being expressed in the form of class action suits, these situations continue to get more difficult to mine through.

Plaintiff attorneys' allegations addressing monetary damages as a result of privacy or security breaches are consistently being brought. Not having adequate controls is the common focus of such suits that follow a breach. Additionally, the bad actors that are trying to improperly gain access to your information will consistently focus on firms who lack simple/intermediate controls.

According to Verizon, 96% of attacks were not highly difficult and 97% of breaches were avoidable through simple or intermediate controls.2 Your own data (account lists, legal documents, vendor agreements, price lists, R&D information, trade secrets) and client/patient information (personally identifiable information/health records) are what the hackers want.

Implementing baseline controls is the first element of fixing your cyber problems.

Several states have enacted laws that expect these baseline controls to be in place to protect their consumers. In Massachusetts, for example, there is a regulation (WISP3) that expects a legal entity holding personal information about a Massachusetts resident, to develop and implement a written information security program to protect that personal information. If this standard is not met, on top of $5,000 civil penalties of up to $5,000 per violation, the corporation could also encounter negligence based on litigation.

Like every state notification law that exists today, the law is based on the location of the consumer, not the corporation's place of domicile. In Nevada, since 2008, businesses have been required to use encryption when transmitting a customer's personal information externally(aside from fax)4. Additionally, PCI (Payment Card Industry) has required all corporations involved in a credit-card transaction to be compliant with varying degree of requirements based on size. For additional information, refer to https://www.pcisecuritystandards.org/merchants/how_to_be_compliant.php.

This is an important step for those companies dealing with credit cards. The 2012 Verizon Data Breach Investigations Report also found that 96% of victims subject to PCI Data Security Standards had not achieved compliance. This statistic shows the important of security controls being taken seriously.

Once your organization takes cyber security controls seriously and understands even the best controls don't isolate them from the exposures that exist, you should than take the time to discuss the insurance implications. Your insurance agent or broker can provide input on how current insurance coverage(s) could respond but also can get you in touch with over 30 insurance markets' underwriters who have dedicated cyber products and submission processes and are able to design coverage specific to your company. Additionally, most markets can help with loss control and ensure that you stay abreast of the current threat environment.

With adequate controls, a general understanding of the regulatory implications of a privacy breach and knowing the insurance consequences, you will be much better prepared if a problem with your company's technology does happen.

1 Cyber Betterley Report 2012

2 Verizon 2012 Data Breach Investigations Report

3 Massachusetts 201 CMR 17

4 Nev Revised Stat 597.970(1)2005