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Risk Scenario

An Insatiable Beast

A beverage maker’s programmable logic computers are destroyed by a cyber worm.
By: | November 2, 2016 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One: Who Kicked the Door In?

Executives with Sweet Life are in a self-congratulatory mode.

Having just plunked down $15 million for a new, just-in-time processing and shipping system, the company leadership feels poised for even greater success.

Sweet Life began its existence in a guest house on an estate in upstate New York owned by the parents of company founder Josh Saltwood.Scenario_AnInsatiableBeast

Starting with a then-unknown Kombucha product, the company grew, selling Kombucha, coconut water and a menu of flavored sparkling water sourced from unquestionably pure springs.

Walk into almost any tony yoga studio along the Atlantic seaboard and you would see some bottle or can with the Sweet Life label on it.

“I want to congratulate everyone involved in this effort,” Saltwood tells his assembled leadership team during a celebratory, well-lubricated meal at one of the best vino-centric restaurants in the Finger Lakes.

Smiles all around, except for Anne Margate, the company’s chief risk officer. Saltwood notices her mood and lifts a wine bottle in her direction as if to offer her more.

She waves the bottle off, and bends her head back down to her BlackBerry, typing feverishly.

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Saltwood just shakes his head.

“She worries too much,” he says to himself.

Two days later comes a jolt of reality for Saltwood in the form of a phone call from his CIO.

“We’ve got a breach. Doesn’t look too extensive but we’re moving to identify any lost data and isolate the problem,” the CIO says.

“Alright, keep me posted if you think it’s going to get uglier. I especially want to know if any customer data gets compromised,” Saltwood says.

“Roger, Wilco,” says the CIO.

It’s uglier than either Saltwood or his CIO could possibly know.

What’s hit Sweet Life is a cyber worm that goes by the name of “Purple Moray.” The name of the worm reveals its intent.

The worm carries a payload that is designed to search out and destroy — just like its ravenous sea eel namesake — programmable logic computers that control machine processes, the very thing that Sweet Life just purchased as part of its $15 million manufacturing upgrade.

Purple Moray is also equipped with a rootkit component, making its passage through Sweet Life’s information technology systems virtually impossible to detect. Try as they might, Sweet Life’s IT team feels like it is not seeing the whole picture.

Sweet Life’s CIO picks up the phone and calls a forensics team he knows in Rochester.

“Yep,” says the CEO of the forensics team when he picks up the phone. He’s eating potato chips as he talks.

“Yeah, hi Mark,” says the CIO, who has known the forensics CEO since high school.

“Whatcha’ got?” Mark says, crunching a chip.

“Are you eating?” the CIO says agitatedly.

“I’m hungry. What is it?” Mark says.

The CIO shakes off his irritation.

“We need you to come down here. We’ve had a breach and we’re not sure of the extent of it,” the CIO says.

“We’ll be there this afternoon.”

Part Two: Gut-Wrenching Pain

The CIO initially fails to tell Anne Margate what’s going on. Sweet Life is a bit of an old boy’s club — though all the top brass is under 40 — and Anne is not a member of the club.

Scenario_AnInsatiableBeast

But she makes a point of finding out what’s going on within the company regardless. It’s when the Rochester forensics team shows up that she gets wind of what’s happened.

“When were you going to tell me about this?” she asks the CIO.

“I … ,” he manages to get out before she cuts him off.

“We need to tell our insurance broker,” she says. “I’ll send you an invite.”

“Which is more than you did for me,” she says to herself under her breath as she walks away.

“OK to summarize,” the broker says on the call, “we need a full list of any customers affected, then move to notify those customers. And keep the forensic work going.”

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“I’ll let the cyber policy carrier and the crime policy carrier know that we might have a claim coming,” the broker says.

The next day the chief of operations comes into work to find that Sweet Life’s spanking new manufacturing system is down, all the way down.

“All the computers are dead, boss,” says one of the line foremen.

Anne Margate, who is now fully engaged in the recovery attempt, barges into the company lunch room.

There she finds Mark, the forensics guy, and two of his teammates settling down to a lunch of pepperoni pizza and a very large meatball sub.

“What’s going on?” she says.

“We’re having lunch,” Mark says.

“I know that, I mean with our manufacturing process,” she says.

Mark pauses to wipe some red sauce off of his chin.

“You’re, who again?” he says.

“I’m the risk manager,” she says, trying to control her anger.

“Oh,” he says. “What’s happened is that your operations have been attacked by a cyber worm. It’s called Purple Moray. It’s disabled the programmable logic computers that control your machine processes,” he says.

“Are they merely disabled or destroyed?” she says.

“We’re getting to that,” says Mark. “As soon as we finish lunch.”

Sweet Life’s broker, exercising an abundance of caution, contacts the company’s property carrier to notify it that Sweet Life may have a claim against this policy as well.

“It looks like the damages are far more extensive than we thought,” Anne Margate says on a call with Saltwood and the company’s property underwriters.

After she gets off the phone with her property underwriters, Anne Margate has the sickening feeling that in the event of the damages caused by a computer worm of this nature, her cyber, crime and property policies might not be all that well aligned.

Part Three: All Gone

“Can anybody in this company tell me what’s going on with this Purple Moray worm?” Josh Saltwood thunders into the phone from his vacation home in the Hamptons.

“All we’ve been able to do is identify it, we can’t stop it,” says the exhausted CIO.

Sweet Life’s situation is weakening day by day.

Scenario_AnInsatiableBeast

In addition to disabling or damaging key pieces of manufacturing equipment, the worm, through a second payload, did access and steal customer data; much more data than the company’s IT department initially understood to be taken.

The company has to inform customers, including the largest natural foods retailer in the country, that although it thought it hadn’t lost their data, it turns out they had.

“We know we told you a week ago that your information was OK, but it’s not OK,” the CIO and Margate tell the retailer on yet another painful call.

“This thing is like some kind of insatiable beast,” says Mark, the forensics guy, as he sits at an in-house Sweet Life computer, an open bag of peppermint bark on the desk.

“You want some bark?” he says to Margate, who is sitting beside him trying to learn as much as she can about cyber hack forensics.

“No thanks,” she says.

“I’ve never seen anything like this,” says Mark.

Over time, the forensics team, working in congress with Sweet Life’s IT team, is able to isolate the Purple Moray malware and remediate some of the damage done to the company’s computer-controlled manufacturing system.

Anne Margate, who worries about everything, finds that her concerns about her insurance policies were somewhat unfounded.

The cyber, crime and property policies all respond, although not to the degree that every loss is covered.

The company’s property coverage was inadequate to cover all of the damage done to the company’s new manufacturing system. The uninsured loss there is more than $5 million.

Sweet Life is facing a daunting task as it deals with a bruised image in the marketplace and strained relationships with its once loyal customers.

Now it also has to improve its cyber security and convince its insurers that it is a good risk going forward. When Josh Saltwood founded Sweet Life, he was one of three licensed retailers selling Kombucha. When Purple Moray struck, there were more than two dozen U.S.-based producers. The burgeoning coconut water market reflects a similar reality.

As Sweet Life tries to claw back to some semblance of success, it faces an initial market share loss of some $10 million annually, and there is no policy that can insure that.

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Risk & Insurance® partnered with FM Global to produce this scenario. Below are FM Global’s recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.

While one could argue whether cyber risk is still “emerging,” it’s the new reality, and should be dealt with like any other hazard. So, let’s examine this scenario using a traditional risk management approach. Although cyber is a relatively new exposure, traditional risk management concepts apply: risk identification, assessment and mitigation.

Essentially, any organization is subject to a cyber attack, and it’s not a matter of if, but when it happens. In this case, Sweet Life had just upgraded its processing and shipping system, when a data breach occurred. How the breach actually occurred is not clear, but we do know that it did cause some major damage to the industrial system control computers. Serious business interruption ensued, which had a deleterious affect on the company’s supply chain and market share.

Just how aware was Sweet Life that its IT systems were at risk? Did Anne Margate, the chief risk officer, fully understand the potential exposure? Had she and the chief information officer had any discussions about business risk impact if the systems were compromised? Today’s risk manager has to think well beyond insurance procurement. In this new digital era, the CIO becomes a new and important ally in managing risk.

Potential questions to ask:

  • To what extent are your business operations tied to computers, and how reliant are you on these systems to keep your operations running? Do you have a back up plan?
  • How secure is your network? How resilient are your email spam filters and malware protection devices?
  • Have employees received proper network security training?
  • Are measures in place to keep potential intruders from gaining access to your network—internally and externally?

Some pre-emptive actions to consider:

  • Determine what information security standard applies to your industry and base your cybersecurity framework on standardized practices.
  • Identify and classify data based on business criticality, as well as sensitivity/confidentiality of data.
  • Identify critical assets and physical/logical network access points at your facility and determine how access is controlled. Prioritize improvement activities.
  • Create and maintain a documented incident response team to respond to cyber events. The plan should be part of a holistic risk management program.
  • Test the plan. Tabletop simulation exercises can test the plan and identify restoration timeframes.

Multiple policies, various coverage: In terms of insurance coverage, cyber losses tend to involve multiple carriers. In this case, Sweet Life had three separate policies for cyber, crime and property. Unfortunately, how these policies would respond in the event of a cyber attack had never been fully vetted. As is the case with any insurance coverage, the time to learn about what is covered is an exercise best conducted before the loss actually occurs. If you have multiple carriers, be sure that you and your broker meet with them in advance to understand how the policies will respond and iron out any discrepancies.




Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.