6 Critical Risks Facing Design Professionals
Call it spear phishing, social engineering or business email compromise. This type of scheme has gotten plenty of coverage in recent years — when fraudsters posing as the boss or a vendor, or client convince an authorized employee to wire transfer funds to a fraudulent account, never to be seen again. Historically, it’s been a form of fraud that offers a quick payout and requires little work on the part of the perpetrator.
But now the thieves are changing their tactics.
“The methods used to perpetrate these fraudulent events are evolving. The fraudsters are investing more effort in orchestrating them, as the payouts can be significant. The targeted “windfall” has expanded too. No longer is it limited to a transfer of funds. We’re now seeing schemes resulting in the fraudulent transfer of tangible property,” said Patricia Barrett, Vice President and Head of Fidelity, Starr Companies.
Criminals are setting their sights on a company’s goods, not just their cash.
To pull that off, thieves use a hybrid of traditional fraud and sophisticated cyber tactics. Through hacking and malware, they can spy on a company’s operations, gathering valuable intelligence on executives and employees. Then they use social engineering tactics to trick workers into unwittingly sending a shipment of products their way.
The experience of one small business — a distributor of small electronic devices — demonstrates how easy it is to fall victim to this type of theft. To sell its products, this company relied on its executives traveling to trade shows throughout the year, often for weeks at a time.
A fraudster, posing as a prospective customer, sent a link in an email to the company’s sales department. Once opened, the link set loose malware that allowed the perpetrator to “lie in wait,” watching the moves of company insiders. The fraudster knew who was scheduled to travel, when, and what type of property the traveler would need to have delivered. The fraudster knew the vernacular used by traveling executives, and what the protocol was for change requests.
Back at the office one day, an employee received an email that appeared to be from the chief executive. “Joe, the trade shows are going really well,” he said, “In fact, I’m down to less than a dozen mobile devices; I’m likely to run out before reaching my next stop.” He instructed the employee to send an additional shipment of electronics to the location of the next show in Las Vegas.
But there was a wrinkle. He’d had to change some travel plans and would no longer be staying at the conference hotel. He booked a room at the hotel across the street. He asked the employee to direct the shipment there instead.
Everything about the request made sense. It was feasible that the executive might need more products. He stated correctly where the next show would be. There was no reason to doubt that he had decided to switch hotels.
“The employee never questioned that the instruction came from the chief executive, so he transferred that property to the hotel and the entire shipment was lost,” Barrett said.
Executing this theft requires in-depth knowledge of a company’s hierarchy, business processes, and of the employees themselves. Because the potential payout is so large, these fraudsters often spend months gathering information before hitting “send” on that fraudulent email.
Malware is often part of their intel-gathering and may be introduced through social engineering. A phony email asking an employee to click a link or download an attachment could be all it takes to get a virus into the system.
By gaining access to the company’s network, thieves can examine billing systems, transaction records and vendor lists, getting a sense of what a normal transfer of goods looks like and who performs them. They can even obtain the executive’s travel itinerary.
They can also glean personal details and communication styles easily from social media.
“The target employee may have posted that he left work early Friday afternoon to attend his son’s baseball game. The copycat executive in the fraudulent email might ask, ‘How was your afternoon off? Who won the game?’” Barrett said. “It builds familiarity. The employee wouldn’t suspect that anyone else would know that level of detail.”
Email is not the only way to perpetrate this type of fraud, however. Criminals can be just as convincing over the phone.
At one organization, the Accounts Payable department received a call from one of their purported vendors, stating that the vendor had consolidated some banking relationships and needed to change the account listed on their contract.
The accounts payable employee sent a change form to an email address provided by the caller. She did not check the master vendor file, but trusted that the email given to her was correct. She did not phone the vendor at a previously verified phone number to validate the request. The caller posing as a vendor sent back the updated form within 15 minutes, and the change was initiated.
The organization proceeded to make three payments to the fraudulent account totaling $700,000. The mistake was not discovered until the real vendor followed up, asking why their payments were delayed.
“The payments slipped through because this was a multi-million-dollar business relationship; and it was not uncommon for them to transact significant business in a short period of time,” Barrett said. “The same tactic could be used to make change orders, diverting a shipment of inventory.”
“Though several insurers will consider providing coverage for fraudulent impersonations that result in a loss of funds, a coverage gap still remains for a loss of other tangible property,” Barrett said.
As with the loss of funds, recovering the stolen property in most cases is next to impossible.
“Once discovered, the trail can go cold very quickly,” Barrett said. To recoup the loss, insureds may have to navigate the intersection of crime, fidelity, cyber, and professional liability coverages.
As cyber criminals grow more sophisticated, calculating and patient, companies need solutions that fill in those gray areas so prevalent in the world of cyber threat and fraud.
Starr Companies crafted an endorsement to its crime and fidelity coverages that covers the loss of other tangible property, in addition to loss of funds, resulting from fraudulent impersonation scams.
“The expanded Fraudulent Impersonation endorsement allows a company to secure coverage for loss of funds and loss of other tangible property; The endorsement is flexible in its structure. This allows the coverage to address the risks that are of most concern to a company. Whether the company is concerned about a loss of funds, a loss of other tangible property, or both the endorsement can be crafted to meet that company’s interests,” Barrett said.
It is widely recognized that one of the best defenses against social engineering risks is education at all levels of a company.
With that in mind, Starr’s Fraudulent Impersonation endorsement is accompanied with the offer of the Starr Companies-KnowBe4 Risk Management Program. KnowBe4 is an internationally recognized IT security firm. This program provides valuable risk management tools to assist in reducing the risk to fraudulent impersonation (social engineering) losses. The downloadable documents are designed to be circulated to employees at every level of the insured company/organization. This program is offered by Starr Companies at no cost to the insured. Upon binding, the Insured company will receive an information packet with instructions on how to access an exclusive area of the KnowBe4 website.
“We believe that the combination of this risk management program and the insurance protection is a winning one for businesses of all types and sizes,” Barrett said.
“Our knowledge and expertise enable us to connect clients with expert resources and to tailor coverage to meet each client’s particular exposures and buying needs,” Barrett said.
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Starr Companies. The editorial staff of Risk & Insurance had no role in its preparation.
Mass shootings in the United States and the emergence of new forms of terrorism in Europe are boosting demand for insurance against losses caused by business interruption when a policyholder suffers no direct property damage, according to insurers.
But brokers say coverage for non-physical damage BI (NDBI), needs to evolve to better meet the emerging needs of corporate clients.
For years, manufacturing clients sought a more comprehensive range of NDBI coverages, especially due to the indirect effects of natural catastrophes such as the Thai floods that disrupted global supply chains in 2011.
More recently, however, hospitality and entertainment companies are expressing interest as they strive to adapt to realities such as the mass shootings in tourism hotspots Las Vegas and Orlando and terror attacks in such popular destinations as New York, Paris, Berlin, Barcelona and London.
In addition to loss of life and property, revenue loss is a real risk. Tragedies that cause a high number of fatalities can cause severe financial losses, especially for companies relying on tourism, as visitors shy away from crime scenes.
Precedents already exist. Paris received 1.5 million fewer visitors than expected in 2016, after the French capital was targeted by a series of deadly terror attacks the year before.
More recently, bookings declined in the immediate aftermath of a shooting at the Mandalay Bay Resort and Casino in Las Vegas that took the lives of 58 people on October 1: Bookings at the hotel have since recovered.
“The recent horrific mass shootings in Las Vegas, Nev., and in Sutherland Springs, Texas, raised awareness and concerns about similar events occurring in areas where the public congregates, such as entertainment venues like sporting events, concerts, restaurants, movie theaters, convention centers and more,” said Bob Nusslein, head of Innovative Risk Solutions Americas, Swiss Re CS.
“The second highest NDBI cover to natural catastrophes is terrorism, including active shooter and mass shootings.”
However, products available in the market do not always provide the protection companies would like. Active shooter coverages, for example, focus mostly on third-party liabilities that policyholders may face after a shooting.
Loss-of-attraction policies often define triggering events with a high degree of detail. These events may need to be characterized as a terrorist attack or act of war by authorities. In some cases, access to the venue needs to be officially cut off by police.
It follows that an attack by a 64-year old ex-accountant who shoots hundreds of people for no apparent reason — as was the case in the Mandalay Bay tragedy — isn’t likely to align with a typical policy trigger.
But insurers say they are trying to adapt to the evolving realities of both mass shootings and terrorism to meet the new needs expressed by clients.
“The active shooting coverage is drawing much interest in the U.S. market right now. In Europe, clients are increasingly inquiring about loss of attraction,” said Chris Parker, head of terrorism and political violence, Beazley.
“What we are doing at the moment is to try and cross these two kinds of products, so that a client can get coverage for the loss of attraction resulting from an active shooting event.”
Loss-of-attraction policies cover revenue loss derived from catastrophic events, and underwriters already offer alternatives that provide coverage, even when no property damage is involved.
To establish the reach of such a policy, buyers can define a trigger radius — a physical area defined in the policy. If a catastrophic event takes place within this radius, coverage will be triggered. This practice is sometimes called “cat in a box.”
Some products specify locations that, if hit by a catastrophic event, will result in lost revenue for the insured. For resorts or large entertainment complexes, for example, attacks on nearby airports could cause significant loss of revenue and could be covered by NDBI insurance.
Measuring losses is a challenge, and underwriters may demand steep retention levels. According to Parker, excess coverage may kick in after a 20 percent to 25 percent revenue drop.
Insurers will also want proof that the drop is related to the catastrophic event rather than economic downturn, seasonal variances or other factors.
“Capacity is very large for direct acts of terrorism but lower for indirect terrorism and violent acts because the exposure is far greater,” said Joey Sylvester, national director of operations & planning, Public Sector, Gallagher.
“Commercial businesses, public entities, religious and nonprofit organizations have various needs for this type of coverage, and the appetite is certainly trending upward.”
It is difficult to foresee which events will cause business disruption. As a result, according to Nusslein, companies generally prefer to purchase all-risk NDBI covers rather than named-perils coverage.
“The main reason is that, if they have coverage for four potential NDBI events and a fifth event occurs, the fifth event is not covered,” he said. “Insurers, new to NDBI covers, still prefer named-perils covers over all-risk cover.”
Current geopolitical tensions are also fueling buyers’ demands.
“Many companies want nuclear, biochemical, chemical and radiological exclusions removed from terrorism NDBI covers. While this is more difficult for insurers, it is not impossible,” Nusslein said.
“War risk NDBI cover is becoming more sought after due to political tensions between the U.S. and North Korea.”
“Many companies want nuclear, biochemical, chemical and radiological exclusions removed from terrorism NDBI covers. While this is more difficult for insurers, it is not impossible.” — Bob Nusslein, head of Innovative Risk Solutions Americas, Swiss Re CS
Natural catastrophes still constitute the largest share of perils underlying NDBI products. Parametric indexes are increasingly employed to provide uncontroversial triggers to policies, said Duncan Ellis, U.S. property practice leader, Marsh.
These indexes range from rainfall levels and wind speed to the measured intensity of earthquakes. Interest in this kind of NDBI coverage expanded after the recent hurricane season.
“The benefit of these products is that you do not have to go through the settlement process, which clients hate,” Ellis said.
NDBI policies are often bespoke, which is more common for very large insurance buyers.
“Usually, the market offers bespoke coverages for individual industries or clients, with very significant deductibles,” said Tim Cracknell, partner, JLT Specialty.
NDBI cover can also help transfer regulatory and product recall risks. The life science sector is expressing interest in this kind of solution for cases where a supplier goes bankrupt or is shut down by a regulator, or a medication needs to be recalled due to perceived flaws in the manufacturing process.
Experts say that concerns still to be addressed are NDBI losses caused by cyber attacks and pandemics.
Capacity is an ongoing concern. According to Swiss Re CS, $50 million to $100 million, or even more, can be achieved through foundation capacity provided by a lead insurer, with syndicated capacity to other insurers and reinsurers, depending on the risk. &