Tag Archives: Joseph Nocera

cyber insurance

Promise, Pitfalls of Cyber Insurance

Cyber insurance is a potentially huge but still largely untapped opportunity for insurers and reinsurers. We estimate that annual gross written premiums will increase from around $2.5 billion today to $7.5 billion by the end of the decade. Many insurers and reinsurers are looking to take advantage of what they see as a rare opportunity to secure high margins in an otherwise soft market.

However, wariness of cyber risk is widespread. Many insurers don’t want to cover it at all. Others have set limits below the levels their clients seek and have imposed restrictive exclusions and conditions – such as state-of-the-art data encryption or 100% updated security patch clauses – that are difficult for any business to maintain. Given the high cost of coverage, the limits imposed, the tight attaching terms and conditions and the restrictions on claims, many companies question if their cyber insurance policies provide real value.

Insurers are relying on tight policy terms and conditions and conservative pricing strategies to limit their cyber risk exposures. But how sustainable is this approach as clients start to question the value of their policies and concerns widen about the level and concentration of cyber risk exposures?

The risk pricing challenge

The biggest challenge for insurers is that cyber isn’t like other risks. There is limited publicly available data on the scale and financial impact of attacks, and threats are rapidly changing and proliferating. Moreover, the fact that cyber security breaches can remain undetected for several months – even years – creates the possibility of accumulated and compounded future losses.

See Also: Better Way to Assess Cyber Risks?

While underwriters can estimate the cost of systems remediation with reasonable certainty, there isn’t enough historical data to gauge further losses resulting from impairment to brands or to customers, suppliers and other stakeholders. And, although the scale of potential losses is on par with natural catastrophes, cyber incidents are much more frequent. Moreover, many insurers face considerable cyber exposures within their technology, errors and omissions, general liability and other existing business lines. As a result, there are growing concerns about both the concentrations of cyber risk and the ability of less experienced insurers to withstand what could become a rapid sequence of high-loss events. So, how can cyber insurance be a more sustainable venture that offers real protection for clients, while safeguarding insurers and reinsurers against damaging losses?

Real protection at the right price

We believe there are eight ways that insurers, reinsurers and brokers could put cyber insurance on a more sustainable footing while taking advantage of the opportunities for profitable growth.

  1. Clarify risk appetite – Despite the absence of robust actuarial data, it may be possible to develop a reasonably clear picture of total maximum loss and match it against risk appetite and tolerances. Key inputs include worst-case scenario analysis. For example, if your portfolio includes several U.S. power companies, then what losses could result from a major attack on the U.S. grid? What proportion of claims would your business be liable for? What steps could you take now to mitigate losses by reducing risk concentrations in your portfolio to working with clients to improve safeguards and crisis planning? Asking these questions can help insurers judge which industries to focus on, when to curtail underwriting and where there may be room for further coverage. Even if an insurer offers no stand-alone cyber coverage, it should gauge the exposures that exist within its wider property, business interruption, general liability and errors and omissions coverage. Cyber risks are increasingly frequent and severe, loss contagion is hard to contain and risks are difficult to detect, evaluate and price.
  2. Gain broader perspectives – Bringing in people from technology companies and intelligence agencies can lead to more effective threat and client vulnerability assessments. The resulting risk evaluation, screening and pricing process could be a partnership between existing actuaries and underwriters who focus on compensation and other third-party liabilities, and technology experts who concentrate on data and systems. This is similar to the partnership between chief risk officer (CRO) and chief information officer (CIO) teams that many companies are developing to combat cyber threats.
  3. Create tailored, risk-specific conditions – Many insurers currently impose blanket terms and conditions. A more effective approach would be to make coverage conditional on a fuller and more frequent assessment of the policyholder’s vulnerabilities and agreement to follow advised steps. This could include an audit of processes, responsibilities and governance within a client’s business. It also could draw on threat assessments by government agencies and other credible sources to facilitate evaluation of threats to particular industries or enterprises. Another possible component is exercises that mimic attacks to test both weaknesses and plans for response. As a result, coverage could specify the implementation of appropriate prevention and detection technologies and procedures. This approach can benefit both parties. Insurers will have a better understanding and control of risks, lower exposures and produce more accurate pricing. Policyholders will be able to secure more effective and economical protection. Moreover, the assessments can help insurers forge a closer, advisory relationship with clients.
  4. Share data more effectively – More effective data sharing is the key to greater pricing accuracy. For reputational reasons, many companies are wary of admitting breaches, and insurers have been reluctant to share data because of concerns over loss of competitive advantage. However, data breach notification legislation in the U.S., which is now set to be replicated in the E.U., could help increase available data volumes. Some governments and regulators have also launched data-sharing initiatives (e.g., MAS in Singapore and the U.K.’s Cyber Security Information Sharing Partnership). In addition, data pooling on operational risk, through ORIC, provides a precedent for more industrywide sharing.
  5. Develop real-time policy updates – Annual renewals and 18-month product development cycles will need to give way to real-time analysis and rolling policy updates. This dynamic approach could be likened to the updates on security software or the approach taken by credit insurers to dynamically manage limits and exposures.
  6. Consider hybrid risk transfer – Although the cyber reinsurance market is relatively undeveloped, a better understanding of evolving threats and maximum loss scenarios could encourage more reinsurers to enter the market. Risk transfer structures likely would include traditional excess of loss reinsurance in the lower layers, and the development of capital market structures for peak losses. Possible options might include indemnity or industry loss warranty structures or some form of contingent capital. Such capital market structures could prove appealing to investors looking for diversification and yield. Fund managers and investment banks could apply reinsurers’ or technology companies’ expertise to develop appropriate evaluation techniques.
  7. Improve risk facilitation – Considering the complexity and uncertainty surrounding cyber risk, there is a growing need for coordinated risk management solutions that bring together a range of stakeholders, including corporations, insurance/reinsurance companies, capital markets and policymakers. Some form of risk facilitator – possibly brokers – will need to bring together all parties and lead the development of effective solutions, including the cyber insurance standards that many governments are keen to introduce. Evaluating and addressing cyber risk is an enterprise-wide matter – not just one for IT and compliance.
  8. Enhance credibility with in-house safeguards – If an insurer can’t protect itself, then why should policyholders trust it to protect them? If the sensitive policyholder information that an insurer holds is compromised, then it likely would lead to a loss of customer trust that would be extremely difficult to restore. The development of effective in-house safeguards is essential in sustaining credibility in the cyber risk market, and trust in the enterprise as a whole.

See Also: The State of Cyber Insurance

Key questions for insurers as they assess their own and others’ security

From the board on down, insurers need to ask:

  • Who are our adversaries, what are their targets and what would be the impact of an attack?
  • We can’t defend everything, so what are the most important assets we need to protect?
  • How effective are our processes, assignment of responsibilities and systems safeguards?
  • Are we integrating threat intelligence and assessments into active cyber defense programs?
  • Are we adequately assessing vulnerabilities against the tactics and tools perpetrators use?


  • Even if an insurer chooses not to underwrite cyber risks explicitly, exposure may already be part of existing policies. Therefore, all insurers should identify the specific triggers for claims, and the level of potential exposure in policies that they may not have written with cyber threats in mind.
  • Cyber coverage that is viable for both insurers and insureds will require more rigorous and relevant risk evaluation informed by more reliable data and more effective scenario analysis. Partnerships with technology companies, cyber specialist firms and government are potential ways to augment and refine this information.
  • Rather than simply relying on blanket policy restrictions to control exposures, insurers should consider making coverage conditional on regular risk assessments of the client’s operations and the actions they take in response to the issues identified in these regular reviews. This more informed approach can enable insurers to reduce uncertain exposures and facilitate more efficient use of capital while offering more transparent and economical coverage.
  • Risk transfer built around a hybrid of traditional reinsurance and capital market structures offers promise to insurers looking to protect balance sheets.
  • To enhance their own credibility, insurers need to ensure the effectiveness of their own cyber security. Because insurers maintain considerable amounts of sensitive data, any major breach could severely affect their market credibility both in the cyber risk market and elsewhere.

7 Key Changes for Insurers’ Cybersecurity

Recognizing the need for better cybersecurity in the insurance sector, the National Association of Insurance Commissioners (NAIC) recently published “Principles for Effective Cybersecurity: Insurance Regulators Guidance.” High-profile data breaches at several health insurance providers exposed data on 90 million consumers, revealing the industry’s vulnerability. So the NAIC document provides best practices for insurance regulators and companies, focusing on the protection of the sector’s infrastructure and data from cyber-attacks.

Thus far, U.S. banks and payment processors have led the way on cybersecurity, both because they have been frequent targets of cyber-attacks and because of strong regulatory enforcement (e.g., FFIEC, GLBA, and PCI DSS). It’s time for insurance companies to play catch-up, and the NAIC is spurring them on.

As a result, we anticipate seven changes:

  1. An increase in cybersecurity regulations;
  2. A focus on consumer privacy;
  3. An increase in cybersecurity spending;
  4. The growing importance of cybersecurity information-sharing and analysis groups;
  5. The board’s and management’s involvement in cybersecurity;
  6. The increased need to manage third-party risks; and
  7. The link between cybersecurity and risk management.


The NAIC is the standard-setting and regulatory-support organization created and governed by the chief insurance regulators from the 50 states, the District of Columbia and five U.S. territories. But individual state and territorial regulators oversee the insurance companies’ practices within their jurisdictions. Only a few states (e.g., New York, California and Massachusetts) have actually enacted data protection laws that apply to the insurance sector. Thus, most individual regulators have been left to their own devices when it comes to cybersecurity practices, particularly given that there is no central regulator defining industry standards and no uniform set of requirements. Consequently, individual regulators on the whole have been using different standards when examining cybersecurity practices, with cybersecurity requirements varying state-to-state.

The NAIC became involved to help both insurance regulators and companies. Specifically, it conducted a multi-state examination of a breached insurer’s cybersecurity practices and determined what actions the company could have taken to minimize its data loss. The NAIC then published two documents related to cybersecurity:

  • “Principles of Cybersecurity” – Created by the NAIC’s cybersecurity task force (formed in November 2014), the document is intended to (a) help insurance regulators identify cybersecurity risks and communicate a uniform set of control requirements to their covered entities and (b) promote cooperation between regulators and the insurance industry in identifying and addressing cybersecurity risks. The document applies to state regulators and insurers, insurance producers and other regulated entities (“covered entities”); and
  • “Annual Statement Supplement for Cybersecurity” – The NAIC’s property and casualty insurance committee created this document to establish requirements for insurers that provide cyber coverage. It requires insurers to report the range of limits offered on cyber insurance policies (both stand-alone and commercial, multi-peril packages), losses paid under each policy, earned premiums, whether policies are claims-made policies and whether tail coverage is offered.

Principles of Cybersecurity

Insurance regulators:

  • Should ensure that confidential and personally identifiable information (PII) that covered entities hold is protected from cybersecurity risks.
  • Should mandate that insurance providers have systems in place to alert consumers in a timely manner of cybersecurity breaches. Insurance regulators should collaborate with insurers, insurance producers and the federal government to achieve a consistent, coordinated approach.
  • Should protect covered entities’ confidential information and PII that is collected, stored and transferred inside or outside of an insurance department or at the NAIC. In the event of a breach, those affected should be alerted in a timely manner.
  • Should deliver flexible, scalable and practical cybersecurity regulatory guidance for covered entities that is consistent with nationally recognized efforts such as those embodied in the National Institute of Standards and Technology (NIST) framework.
  • Should make regulatory guidance risk-based and consider the resources of the covered entities, with the caveat that a minimum set of cybersecurity standards must be in place for all covered entities that are physically connected to the Internet, regardless of size and scope of operations.
  • Should provide appropriate regulatory oversight, including conducting risk-based financial examinations or market conduct examinations regarding cybersecurity.

Covered entities:

  • Should appropriately safeguard customer PII that is collected, stored and transferred inside or outside of a covered entity’s network.
  • Should implement incident response planning activities as part of a cybersecurity program, including conducting cyber incident response tabletop exercises.
  • Should take appropriate steps to ensure that third parties and service providers have controls in place to protect PII. This may include third-party assessments to understand service providers’ current controls environments.
  • Should incorporate and address cybersecurity risks as part of the enterprise risk management process. Cybersecurity transcends the information technology department and must include all facets of an organization.
  • Should have a board of directors or its appropriate committee review information technology audit findings that present a material risk to an organization.
  • Should participate in an information-sharing and analysis group to share information and stay informed regarding emerging threats or vulnerabilities.
  • Should consider periodic and timely training, paired with an assessment, to be an essential component of all cybersecurity programs.

What Should Insurance Companies Expect?

Over the next few years, we anticipate many changes in the insurance sector related to cybersecurity, including:

  1. Increase in Cybersecurity Regulations – According to PwC’s recently released “The Global State of Information Security Survey,” cybersecurity regulation within the financial services industry is only expected to increase in 2015 and beyond. Based on the NAIC’s guidance, we expect the various U.S. states and their insurance regulators to pass cybersecurity regulations to ensure that covered entities have adequate controls in place to protect consumer PII. Covered entities will be required to demonstrate resilience to cyber-attacks, including malware attacks, insider threats, data corruption and destruction and denial of service attacks.
  2. Focus on Consumer Privacy – In addition to cybersecurity regulations, covered entities will be expected to comply with privacy regulations. The Consumer Privacy Bill of Rights, which the Obama administration proposed, includes provisions mandating transparency, individual control, respect for context, focused collection and responsible use, security, access and accuracy and accountability. If passed into law, the Consumer Privacy Bill of Rights would require covered entities to provide transparent descriptions of their data collection practices, and to limit how and what data they collect. Additionally, global data privacy laws, such as the European Union’s General Data Protection Regulation, increase compliance obligations of U.S. insurance companies doing business globally.
  3. Increase in Security Spending – To implement adequate controls and comply with the regulatory requirements, covered entities will increase their cybersecurity spending. According to the New York State Department of Financial Services (NYDFS) study, “Report on Cyber Security in the Insurance Sector,” released in February 2015, 86% of insurers expect their security budgets to increase in the next three years. The study noted that only 51% of insurers had budgeted for cybersecurity incidents.
  4. Importance of Information Sharing Organizations – Information-sharing will be an essential part of insurance companies’ cybersecurity strategies. We expect to see more insurance companies join Information Security and Analysis Centers (ISAC), such as FS-ISAC, or the recentlyannounced insurance ISAO.
  5. Board and Management Involvement – For organizations to better address cybersecurity threats and regulatory guidance, we anticipate a push to increase senior management and board involvement in cybersecurity issues and decision-making. According to the NYDFS study, only 30% of boards receive updates on cybersecurity issues on a quarterly basis.
  6. Managing Third-Party Risks – Concerns will grow around third-party risks and potential cybersecurity threats that can arise when sharing networks with business partners. Covered entities will be expected to demonstrate adequate oversight of their service provider relationships.
  7. Link Between Cybersecurity and Risk – As cybersecurity incidents continue to proliferate, organizations must reposition their security strategies to align closely with their broader risk-management activities.