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How to Determine Your Cyber Coverage

Public agencies and organizations around the world are making cyber risk their top priority. North American policyholders dominate the market, but Europe and Asia are expected to grow rapidly over the next five years due to new laws and significant increases in targeted attacks, such as ransomware. Various experts predict the $3 billion global cyber insurance market will grow two-, three- or even four-fold by 2020.

Deciding how much cyber insurance to buy is no inconsequential matter, and the responsibility rests squarely with the board of directors (BoD). Directors and executives should have the highest-level view of cyber risk across the organization and are best-positioned to align insurance coverage with business objectives, asset vulnerability, third-party risk exposure and external factors.

See also: New Approach to Cyber Insurance  

So, how much does your organization stand to lose from a supply chain shut down, a web site outage or service downtime?

Recent data points from breach investigations help frame the discussion around risks and associated costs. Following a variety of high-profile breaches helps ensure that your projected coverage requirements match up with reality. Be sure to follow older cases for deeper insight into the full expense compared with insurance payout; related costs and losses are often incurred for years afterward due to customer and market response as well as legal and regulatory enforcement actions.

In 2013, Target suffered a very public breach that resulted in the resignation of the CEO, a 35-year employee. Target had purchased $100 million in cyber insurance, with a $10 million deductible. At last count, Target reported that the breach costs totaled $252 million, with some lawsuits still open.

Home Depot announced in 2014 that between April and September of that year cyber criminals stole an estimated 56 million debit and credit card numbers – the largest such breach to date. The company had procured $105 million in cyber insurance and reported breach-related expenses of $161 million, including a consumer-driven class action settlement of $20 million.

These cases illustrate the need for thoughtful discussion when deciding how much breach insurance to buy. Breach fallout costs depend on multiple factors, are not entirely predictable and can rise quickly due to cascading effects. Cases in point: the bizarre events surrounding Sony’s breach and the post-breach evisceration of Yahoo’s pending deal with Verizon.

Organizations need to review their security posture and threat environment on a regular basis and implement mechanisms for incessant improvement. The technology behind cyber security threats and countermeasures is on a sharp growth curve; targets, motives and schemes shift unpredictably. Directors may find it useful to assess risk levels and projected costs for multiple potential scenarios before cyber insurance amounts are decided upon.

Most policy premiums are currently based on self-assessments. The more accurate the information provided in your application, the more protected the organization will be. Most policies stipulate obligations the insured must meet to qualify for full coverage; be sure to read the fine print and seek expert advisement.

A professional security assessment can pinpoint areas in need of improvement. If you claim to be following specific protocols, but a post-breach investigation finds they were poorly implemented, circumvented or insufficiently monitored, the insurer may deny or reduce coverage. Notify your insurance provider immediately about significant changes to your security program.

Review policy details regularly to ensure they match prevailing threats and reflect the evolution of crimeware and dark web exploits. Cyber insurance carriers continually adjust their offerings based on risk exposure and litigation outcomes.

See also: Promise, Pitfalls of Cyber Insurance  

As the industry matures, cyber insurance policies will become more standardized. For now, it’s an evolving product in a dynamic market; boards and executives need to keep an eye on developments. Simultaneously, they must maintain a high degree of visibility across their security program. Checking off compliance requirements, writing policies and purchasing security software isn’t sufficient.

My advice is to lead from the top. Organizations need to ensure risk assessments are thorough and up-to-date, policies are communicated and enforced and security technology is properly configured, patched and monitored.

Turning a blind eye to cyber threats and organizational vulnerabilities can have disastrous consequences. Cyber insurance may soften the financial blows, but it only works in conjunction with an enterprise-wide commitment to security fundamentals and risk management.

The Big Lesson From Amazon-Whole Foods

I doubt that Google and Microsoft ever worried about the prospect that a book retailer, Amazon, would come to lead one of their highest-growth markets: cloud services. And I doubt that Apple ever feared that Amazon’s Alexa would eat Apple’s Siri for lunch.

For that matter, the taxi industry couldn’t have imagined that a Silicon Valley startup would be its greatest threat, and AT&T and Verizon surely didn’t imagine that a social media company, Facebook, could become a dominant player in mobile telecommunications.

But this is the new nature of disruption: Disruptive competition comes out of nowhere. The incumbents aren’t ready for this and, as a result, the vast majority of today’s leading companies will likely become what toast—in a decade or less.

Note the march of Amazon. First it was bookstores, publishing and distribution, then cleaning supplies, electronics and assorted home goods. Now, Amazon is set to dominate all forms of retail as well as cloud services, electronic gadgetry and small-business lending. And the proposed acquisition of Whole Foods sees Amazon literally breaking the barriers between the digital and physical realms.

See also: Huge Opportunity in Today’s Uncertainty  

This is the type of disruption we will see in almost every industry over the next decade, as technologies advance and converge and turn the incumbents into toast. We have experienced the advances in our computing devices, with smartphones having greater computing power than yesterday’s supercomputers. Now, every technology with a computing base is advancing on an exponential curve—including sensors, artificial intelligence, robotics, synthetic biology and 3-D printing. And when technologies converge, they allow industries to encroach on one another.

Uber became a threat to the transportation industry by taking advantage of the advances in smartphones, GPS sensors and networks. Airbnb did the same to hotels by using these advancing technologies to connect people with lodging. Netflix’s ability to use internet connections put Blockbuster out of business. Facebook’s  WhatsApp and Microsoft’s Skype helped decimate the costs of texting and roaming, causing an estimated $386 billion loss to telecommunications companies from 2012 to 2018.

Similarly, having proven the viability of electric vehicles, Tesla is building batteries and solar technologies that could shake up the global energy industry.

Now, tech companies are building sensor devices that monitor health. With artificial intelligence, these will be able to provide better analysis of medical data than doctors can. Apple’s ResearchKit is gathering so much clinical-trial data that it could eventually upend the pharmaceutical industry by correlating the effectiveness and side effects of the medications we take.

As well, Google, Facebook, SpaceX and Oneweb are in a race to provide Wi-Fi internet access everywhere through drones, microsatellites and balloons. At first, they will use the telecom companies to provide their services; then they will turn the telecom companies into toast. The motivation of the technology industry is, after all, to have everyone online all the time. The industry’s business models are to monetize data rather than to charge cell, data or access fees. They will also end up disrupting electronic entertainment—and every other industry that deals with information.

The disruptions don’t happen within an industry, as business executives have been taught by gurus such as Clayton Christensen, author of management bible “The Innovator’s Dilemma”; rather, the disruptions come from where you would least expect them to. Christensen postulated that companies tend to ignore the markets most susceptible to disruptive innovations because these markets usually have very tight profit margins or are too small, leading competitors to start by providing lower-end products and then scale them up, or to go for niches in a market that the incumbent is ignoring. But the competition no longer comes from the lower end of a market; it comes from other, completely different industries.

The problem for incumbents, the market leaders, is that they aren’t ready for this disruption and are often in denial.

Because they have succeeded in the past, companies believe that they can succeed in the future, that old business models can support new products. Large companies are usually organized into divisions and functional silos, each with its own product development, sales, marketing, customer support and finance functions. Each division acts from self-interest and focuses on its own success; within a fortress that protects its ideas, it has its own leadership and culture. And employees focus on the problems of their own divisions or departments—not on those of the company. Too often, the divisions of a company consider their competitors to be the company’s other divisions; they can’t envisage new industries or see the threat from other industries.

This is why the majority of today’s leading companies are likely to go the way of Blockbuster, Motorola, Sears and Kodak, which were at the top of their game until their markets were disrupted, sending them toward oblivion.

See also: How to Respond to Industry Disruption  

Companies now have to be on a war footing. They need to learn about technology advances and see themselves as a technology startup in Silicon Valley would: as a juicy target for disruption. They have to realize that the threat may arise in any industry, with any new technology. Companies need all hands on board — with all divisions working together employing bold new thinking to find ways to reinvent themselves and defend themselves from the onslaught of new competition.

The choice that leaders face is to disrupt themselves—or to be disrupted.

Thought Leader in Action: Chris Mandel

Back in the ’70s, Chris Mandel quite literally stumbled into insurance, as a result of a racketball injury at Virginia Polytech Institute when he suffered a detached retina. After two months of lying flat in a hospital bed, he had to forego his post-graduate job in retail management and start looking for employment in D.C. — he began an unexpected career in managing claims at Liberty Mutual.

Mandel excelled in his job but realized a career in claims management wasn’t what he wanted. So, in the early ’80s, he moved to Marsh brokerage for five years and set up a risk management program for an AT&T spinoff that evolved into what is now Verizon. He then left Marsh to be Verizon’s first risk manager — building its program from scratch.

By the ’90s, he landed in several top corporate risk management positions at the American Red Cross, Pepsico/KFC and Triton Global Restaurants (YUM Brands). Mandel also began his six-year volunteer stint as the president of RIMS (1998-2004), after serving in many different key RIMS leadership roles. He earned an MBA in finance from George Mason University along the way.

By 2001, Mandel was on several advisory boards (i.e. Zurich, AIG, FM Global and Liberty Mutual), before making a career and geographic move to the USAA Group in San Antonio. There, he built an enterprise risk management (ERM) program because he saw a “broken traditional approach” to risk management. After nearly 10 years of developing an ERM program lauded in the industry (including by AM Best, Moody’s and S&P), Mandel was promoted at USAA to head of enterprise risk management, as well as president and vice chair of Enterprise Indemnity, a USAA commercial insurance subsidiary. While at USAA, he was recognized as Business Insurance’s Risk Manager of the Year (2004).

His dream was to be a corporate chief risk officer, but he saw that title more often going to “quants,” (like actuaries), rather than risk professionals. So, as a well-known and sought-out industry spokesperson and visionary, Mandel moved on from USAA in 2010 to found a Nashville-based risk management consulting group, then-called rPM3 Solutions, which holds a patent on a game-changing enterprise risk measurement methodology. Then, in 2013, he moved to Sedgwick as a senior vice president. He is responsible for conducting scholarly research, driving innovation, managing industry relations and forging new business partnerships.

In early 2016, he was appointed director of the newly formed Sedgwick Institute, which is an extension of the firm’s commitment to delivering innovative business solutions to Sedgwick’s clients and business partners — as well as the whole insurance industry. In 2016, Mandel was awarded RIMS’ distinguished Goodell Award (see video below).

When asked what he sees as critical strengths for someone entering risk management, Mandel said: “I try to hire managers who can think strategically and who can convince C-suiters and boards of the value of being resilient in addressing a company’s risk profile. Progressive leaders understand the strategy to leverage risk for value.”

A holistic approach, as he describes it, “seeks a vantage point that can assess both the upside and downside of all foreseeable risks.” He believes true innovation evolves from a company’s risk-taking. “It’s not so much identifying what or when adversity is going to happen, it’s how a company responds to risk in order to minimize disruption,” he said.

In assessing his personal strengths and accomplishments, Mandel feels that a person needs to be “emotionally intelligent” — able to adapt to different people in organizations. He doesn’t consider himself a people person but says he learned to be one the hard way. He advises: “Team spirit is putting other people first and helping them succeed. … Admit your failures and build trustworthiness from your mistakes.”

Besides writing, teaching, speaking and (still) playing racketball, he serves an active role as an advisory board member of Insurance Thought Leadership. He and his wife also serve in church ministries, where he often plays guitar alongside his grown children, who are ordained ministers. Mandel said, “I’m blessed by a Creator who’s had my back.”

Verizon Strike: Silver Lining and a Lesson

A strike of 40,000 Verizon employees could be the best thing that has ever happened to the telecom company’s customer experience.

That’s not because the managers filling in for the front-line workers are better at serving customers (a company executive acknowledged as much in a recent Washington Post interview).

Rather, it’s because these managers are getting a first-hand, unvarnished look at what it’s like to be on the front-line. They’re seeing, with their own eyes, the obstacles that hamper employees’ best efforts to deliver a consistently great customer experience.

Verizon managers and professional staff who normally work with spreadsheets, reports and legal briefs are instead donning call center headsets, laying fiber optic cable and installing internet service. And, as the Wall Street Journal recently reported, when these organizational leaders temporarily take on a front-line role, they’re spotting a variety of improvement opportunities.

An operations head whose management reports frequently showed wide variations in TV/internet installation times suddenly saw the reasons why such variations exist, putting him in a much better position to come up with solutions.

An engineer who normally monitored Verizon’s network from an office cubicle quickly discovered how work schedules can be completely disrupted when installers don’t get the information they need (such as whether a customer’s residence has previously been wired for cable or Internet).

Front-line annoyances — things that make workers’ jobs harder than they need to be — also came to light, such as how quickly the batteries drained in field technicians’ smartphones and tablets. (A Verizon manager is now exploring supplying the company’s installers with portable battery packs for their devices.)

See also: Is Verizon About to Outmaneuver Insurers?

These examples all illustrate the inherent limitations of relying on spreadsheets, reports and other traditional management information sources to reveal workplace impediments.

The internal obstacles that undermine a company’s customer experience are frequently rooted in some of the most mundane and unglamorous activities. They involve things that often don’t make it into a management report and don’t get discussed at an executive staff meeting.

By periodically venturing “into the wild” and stepping into the shoes of employees, managers can guard against this blind spot. They can witness what’s really happening on the front lines and can gain insight that’s difficult to obtain in any other way.

When armed with this unfiltered perspective, managers are much better equipped to develop actionable improvement plans — the kind that don’t just enhance the customer experience but the employee experience, too.

Don’t wait for a worker strike or some other crisis situation before venturing out to your front line. Set aside time now and start walking a few miles in your staff’s shoes.

As Verizon’s managers are fast learning, there’s no better way to understand and start overcoming the internal impediments that can sabotage your customer experience.

This article first appeared at Watermark Consulting.

Healthcare Costs: We’ve Had Enough!

Healthcare is consuming an ever-greater share of corporate America’s balance sheet. According to the latest Kaiser Family Foundation survey, today’s employers spend, on average, $12,591 for family coverage—a 54% increase since 2005.

Some companies have finally had enough. Twenty of America’s largest corporations—including American Express, Coca-Cola and Verizon—recently formed a coalition called the Health Transformation Alliance. They’re planning to pool their four million employees’ healthcare data to figure out what’s working and what’s a waste of money.

Eventually, they could leverage their collective purchasing power to negotiate better deals with healthcare providers.

It’s a worthwhile experiment. The government has largely failed to rein in spiraling healthcare costs; in fact, by over-regulating the healthcare marketplace, it’s largely made the problem worse.

The private sector will have to take matters into its own hands and find ways to creatively deploy market forces to its benefit.

Collectively, U.S. employers provide health coverage to about 170 million Americans. Because many pay part—if not all—of their workers’ premiums, they’ve borne the brunt of the upward march of healthcare costs. According to the Kaiser Family Foundation, premiums for employer-based family insurance have increased 27% over the last five years, and 61% over the last 10.

Unfortunately, this growth won’t slow any time soon. The Congressional Budget Office estimates that average premiums for employer-based family coverage will reach $24,500 in 2025—a 60% increase over premiums today.

Understandably, companies are desperate to find ways to curb their healthcare spending.

Last year, one of every three employers reported increasing cost-sharing for employees, through higher deductibles or co-payments. Another 15% said they cut worker hours to avoid falling afoul of Obamacare’s employer mandate, which requires firms to provide health insurance to anyone working 30 or more hours a week.

See Also: Radical Approach on Healthcare Crisis

But shifting costs elsewhere simply masks employers’ health-cost problem. They’ll have to address inefficiencies in the way healthcare is delivered to bring about savings that will actually stick.

The Health Transformation Alliance sees three primary ways to do so.

First, companies will have to mine their healthcare data for insight, just as they analyze the numbers for sales, operations and other core business functions.

The Alliance will examine de-identified data on employees’ health spending and outcomes. The hope is to determine which providers are delivering the best care at the lowest cost and to then direct workers toward these high-performing providers.

The U.S. healthcare sector today is awash with ambiguity and a lack of transparency. A knee replacement can cost $50,000 at one hospital but $30,000 at another. Two hospitals may offer the same price on a procedure, but one may have a higher rate of infection.

Such differences matter. According to a 2013 report in the Journal of the American Medical Association, an infection can add, on average, $39,000 to a surgery’s price tag.

Second, employers will have to use their combined buying power to secure better deals on healthcare. Tevi Troy, the CEO of the American Health Policy Institute, the organizing force behind the Alliance, said, “If you brought together multiple employers, you would have more leverage, more covered lives, more coverage throughout the country in terms of regional scope.”

In other words, there’s safety—and potentially lower healthcare costs—in numbers.

Third, employers will have to educate their workers about how they can secure better care at lower costs.

Most consumers are clueless about where they should seek healthcare. They may welcome a gentle nudge from their employer toward a high-quality, low-cost clinic or provider. If it saves their bosses some money, all the better.

See Also: What Should Prescriptions Cost?

And as the Alliance hopes to prove, it’s a lot easier to borrow another company’s successful strategy for executing those nudges than to create one from scratch. An educational campaign that resonates with Verizon’s 178,000 employees, for instance, may do just the same with IBM’s 300-some-thousand staffers.

As Marc Reed, chief administrative officer of Verizon, explained, “What we’re trying to do is to make this sustainable so that kind of coverage can continue.”

Corporate America has been saying for years it cannot afford the healthcare status quo, with costs rising ceaselessly. But if employers use their healthcare data wisely—and capitalize on their collective bargaining power—they may discover that salvation from their health-cost woes lies within.