Cyber insurance is changing the way we look at risk
by Yoav Leitersdorf, Ofer Schreiber, Iren Reznikov.
If, or more accurately, when your company is hit by a cyber attack, do you have what you need to recover? Do you know what kind of losses you can afford to absorb in your bottom line? How do you manage your risks? Have you thought about whether you need cyber insurance?
Back in 2011, Sony’s PlayStation network was breached; attackers compromised more than 77 million personal accounts, costing Sony an estimated $170 million. They thought their general liability insurance policy covered them, but they were wrong. Sony took their insurers to court, where the courts confirmed Sony’s policy didn’t cover the damages of the cyber breach.
It was a painful lesson for Sony, one they were determined to not repeat. When they were breached in 2014, they had a cyber insurance policy in place that experts predict will cover most, if not all, of their estimated $100 million in losses. Sony Pictures’ CEO confirmed the costs to recover from the latest breach “shouldn’t be anything that is disruptive to our budget.”
What we can learn from Sony
Sony learned to assess the risk a cyber attack posed to their business and took steps to mitigate its potential impact. While your company may be smaller, and lower profile than Sony, the risk of a cyber attack is still very real and needs to be considered in your business context.
The Verizon 2016 Data Breach Investigation Report confirms that companies large and small, across all industries, in all geographies, are at risk of being targeted by a cyber attack; in fact, it is estimated that 62 percent of cyber breach victims are small to mid-sized businesses. The average total cost of a breach, according to the 2015 Cost of Data Breach Study: Global Analysis, is now at $3.79 million.
What are organizations doing to prepare themselves?
They are expanding their efforts to put as many safeguards as possible in place. Beyond deploying breach prevention controls in the infrastructure or beefing up managed security services, one of the safeguards gaining popularity to help companies manage their risks is cyber insurance. A recent 2016 survey found that 59 percent of organizations incorporate cyber insurance into their strategic plans to manage cyber risks, with the highest rate among large corporations.
What is cyber insurance?
Cyber insurance is a sub-category within the general insurance industry, offering products and services designed to protect businesses from internet-based risks. Although forms of cyber insurance policies have been around for the past 10 years, market awareness has recently increased exponentially, in part because of the headline-grabbing cyber breaches that have hit almost every industry.
There is no standard form for a cyber insurance policy on the market.
In addition, demand for cyber insurance has been fueled by governments, which are becoming more actively involved in policing corporate responses to cyber attacks. There are now mandatory data breach notification laws in many countries; we are seeing organizations buy cyber insurance policies to help them cover the notification costs they will incur in the wake of a cybersecurity breach.
In just a couple of years, the U.S. cyber insurance market has grown from about 10 insurers to 50 that provide stand-alone cyber insurance policies. In 2015, these providers generated $2.75 billion in premium revenues in the U.S. According to a recent study by PwC, this number is set to triple to $7.5 billion by 2020.
Breaking down a cyber insurance policy
Most cyber policies currently on the market offer a combination of two types of insurance coverage:
- First-party coverage: covers direct losses to the organization.
- Third-party coverage: protects against claims against the organization by third parties, such as customers or partners.
Besides financial coverage, insurers also provide risk management and post-breach services, including loss-prevention measures and remediation tools.
The trouble with assessing risk
Unlike other types of insurance, there is no standard form for a cyber insurance policy on the market. Today, before insurance companies can offer a cyber policy, they must understand the prospective client’s risk profile. To determine the premium, they look at the scale of the business, the sensitive nature of the data it handles and stores and its overall security posture.
It is difficult, however, to quantify an organization’s posture and risks. There is not a lot of credible historical data on losses and very little visibility into a prospective client’s ability to handle past and future cyber incidents. This has made insurers cautious, resulting in some insurers offering high premiums and low policy coverage or demanding clients incorporate new technologies before they can be insured.
Cyber insurance has a role to play in a company’s overall risk mitigation strategies.
Even when purchased, there’s no way to really know if it’s enough — some believe the attack on Anthem, the second largest health insurer in the U.S., could end up costing them upwards of a billion dollars, which means their cyber insurance coverage, which is estimated to be between $150 to $200 million, may not be enough to cover the final costs.
With this backdrop it’s easy to see how hard it is for insurers to determine what the policy’s premium should be and for businesses to determine how much coverage they are going to need. Both need a way to more accurately assess risk and determine a company’s risk profile.
The cyber insurance market — an opportunity for the cybersecurity startup ecosystem
The uncertainty in the cyber insurance market presents opportunities for risk assessment tools, which can help both insurers and insured companies determine a company’s risk posture. There are automatic tools that help with risk assessment and scoring that can bring a little more transparency to the insurance market. Companies in this space include BitSight Technologies, SecurityScorecard and PivotPoint Risk Analytics.
We believe we will be seeing more vendors enter this market, perhaps even more specialized startups operating in the cyber insurance industry exclusively. For example, QuadMetrics, a U.S.-based startup, is already operating in this field, helping underwriters set premiums for cyber insurance policies based on a predictive cybersecurity risk analysis.
We may also see insurance companies open cybersecurity departments and offer pre-breach and post-breach services, such as security architectural analysis, monitoring, incident response, forensics and more. If this happens, we will likely see insurance companies start hiring cybersecurity specialists and even “acqui-hiring” cybersecurity startups.
This can bring interesting opportunities for the cybersecurity startup ecosystem as a whole, especially for those companies that offer products and services that can be incorporated into cyber insurance strategies.
One thing is certain, the way we look at risk is evolving and cyber insurance has a role to play in a company’s overall risk mitigation strategies. The extent to which it will enable us to better assess and ultimately combat the rising threat landscape we are facing is still to be seen.