Fear of Cyber

Brokers Balking at Cyber Insurance

Brokers may be dropping the ball on cyber coverage for smaller clients.
By: | February 18, 2014 • 7 min read

Cyber crime, espionage and other “malicious cyber activity” cost the United States anywhere from $24 billion to $120 billion each year, according to a joint report by McAfee and the Center for Strategic and International Studies. That price tag comprises loss of intellectual property, sensitive business information and personally identifiable information (PII), reputational damage, and the costs of fixing security systems and recovering from data breaches.

As businesses become more dependent on technology, hackers likewise grow more sophisticated in their attacks, exposing businesses big and small to debilitating breaches.

Cyber crime, espionage and other “malicious cyber activity” cost the United States anywhere from $24 billion to $120 billion each year.

Entities as big as the New York Times, JPMorgan and Target have suffered hits, but research suggests that smaller, mom-and-pop shops make easy targets for cyber thieves looking to cash in on stolen debit and credit card numbers.

“It doesn’t matter what size company you are or what industry you are,” said Tim Francis, enterprise cyber lead, Travelers. “You should consider yourself a target.”

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“From some things I’ve read,” said Marty Frappolli, senior director of knowledge resources at The Institutes, “the average cost of a data breach is more than $5 million, and the FBI is on record saying that most small businesses won’t survive a cyber attack.”

High-profile attacks have raised awareness about cyber liability, both among the business community and regulators. Forty-six states, the District of Columbia, Guam, Puerto Rico and the Virgin Islands all have laws requiring private or government entities to notify individuals of PII security breaches.

And yet the development of cyber insurance products and take-up by smaller and medium-sized businesses remains somewhat stagnant. Shouldn’t companies be scrambling to get coverage for one of their scariest business threats? Somewhere between the awareness of cyber risk and actually purchasing insurance against it, there’s a dangerous disconnect. Indications are that brokers may be the weak point.

Are Brokers Balking?

In internal research conducted by one major underwriter, a survey of both brokers and insurance buyers found that buyers expressed interest in purchasing cyber coverage, but hadn’t followed through mainly because their brokers hadn’t engaged with them or educated them about the topic.

Correspondingly, a much lower number of brokers claimed that their clients had a need, under-reporting the interest their customers had expressed. Taking the responses of both groups together, the underwriter concluded that a significant number of brokers may not fully understand cyber exposures or the insurance solutions on the market, and therefore are shirking the topic altogether.

A survey conducted by Marsh at their annual Communications, Media and Technology conference revealed similar findings. While 69 percent of attendees indicated increased concern about cyber security and liability over the past year, few had made moves to tighten their risk management.

Just 13 percent thought cyber risk was a matter for the risk management function, with most believing that the responsibility should fall to the IT department. Only about one-fifth of respondents said that their organization currently purchased cyber insurance, and only 11 percent of them felt confident that their coverage met their needs.

Clearly, there is a communication gap between buyers and the insurance community, and the onus falls on brokers to bridge it. 

Emerging, Evolving Risk

Brokers could be side-stepping cyber coverage for several reasons. First and foremost, novelty and constant change.

“[One broker] felt that she couldn’t present the cyber quotes to her clients because she really couldn’t explain how the policies were different.”
– Nick Economidis, underwriter, Technology, Media and Business Services, Beazley

“Cyber risk, even though it’s been around for decades, is still an emerging, evolving risk,” Frappolli said. Exposures are ever-changing, and insurance solutions must change as rapidly to address them.

Lack of standardization in terminology also contributes to the confusion.

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Nick Economidis, underwriter for Beazley’s Technology, Media and Business Services group, said he “met with one insurance broker who said that all the policy forms were different, and it was hard to understand how they compared to each other.

“She felt that she couldn’t present the cyber quotes to her clients because she really couldn’t explain how the policies were different,” he said.

Greg Gamble, director, Management and Professional Risk Group, Crystal & Co., said that while coverage is standard, policy wording varies among the 15 or so carriers that offer it.

“In that regard, it’s confusing because we have to make this understandable to our customer base and articulate it back to them in a way that makes sense.

“I would agree that there could be more standardization among carriers,” Gamble said, “but I don’t think that’s coming anytime soon because carriers have a lot of private ownership of their policies. They have people who’ve spent a tremendous amount of time developing those products, and they label agreements and write the policies their own way, and I don’t think they’re focused on coming together with industry standard categories of coverage.”

Tough Regulatory Environment

Varied state regulations also factor into non-uniform policies. Different legislatures have different notification standards, which affects what a company can stand to lose through notification costs alone.

“There are new laws coming through at the federal and state levels. European law is changing,” said Chris Keegan, senior vice president, Willis. “The ways in which technology is being used is changing, which can make those laws out of date very quickly.

“A lot of people are hoping for federal level simplification. We’ve seen Congress trying to put that in place for the last four or five years but they never seem to be able to get that legislation passed,” he said.

Notification laws can easily throw brokers for a loop.

Ken Goldstein, worldwide cybersecurity manager, Chubb Insurance, said it can be hard to keep track of who needs to be notified of a breach in which state. Some laws require attorneys general to be notified in states where customers were affected, and some require that credit monitoring agencies be alerted, depending on what type of information was disclosed.

“Different industry segments have different legal and regulatory requirements,” Goldstein said. “Identifying these exposures will ultimately help agents and brokers figure out how to protect clients from an insurance perspective.”

In-House Expertise

Not all brokers struggle with the changes, though. Larger brokerage houses and carriers have teams dedicated to researching, assessing and developing products responding to cyber risk. Brokers that have that in-house specialized expertise at their disposal have a much easier time finding the right solutions for their clients.

“There are only about five brokerage houses that have people with that level of expertise.”
– Chris Keegan, senior vice president, Willis

But indications are that the community of experts among brokers remains too small.

“There are only about five brokerage houses that have people with that level of expertise,” Keegan said. “For some of the other houses that don’t have that internal specialized expertise, they may struggle to get the consulting and policy advice that clients need.”

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That explains why take-up is much lower among small and mid-sized businesses: They generally don’t have the same resources as large companies to work with the handful of big brokerages with in-house experts.

Some carriers also offer tools like breach cost calculators and risk assessment portals that allow brokers to estimate the financial impact of notification, data cleanup and business interruption. But those resources might not be enough. According to Travelers’ Francis, carriers could do more to work with and educate brokers on their coverages.

“One of the ways the industry can be working to address this issue is having carriers that not only deliver products, but are experts in the products they’re selling,” he said. Carriers should be helping brokers understand each account’s unique level of exposure and the insurance solutions available. “That collaboration right now is as important as, or more important than, the insurance product that is the end delivery,” he said.

“For smaller and mid-sized businesses, there really is great opportunity for the agents and brokers to fill that knowledge gap,” said Frappolli of The Institutes. “I would say that best-in-class agents are doing this for their clients. There’s always an opportunity for the broker to be not just somebody who sells you an insurance policy, but somebody who is your de facto risk manager.”

Solutions in Education

There are ways brokers can educate themselves on the evolving cyber environment, beyond reading journals and attending webinars. Conferences, for example, provide easy access to expert speakers, said Mark Greisiger, president of NetDiligence, which hosts twice-yearly educational forums on cyber risk.

“Both the speakers and attendees are the insurance companies, and their inside lawyers sometimes. We have retail and wholesale brokers attending. We have risk managers and CFOs who buy the insurance there, and various state and federal regulators. Many top security experts who can help customers safeguard their data come and speak as well,” he said.

“We also see a lot of smaller brokerage groups coming, because they need that technical expertise,” Greisiger said.

According to Willis’ Keegan, the industry can expect to see a lot of growth in take-up in cyber coverage among smaller clients in the next two to three years.

Brokers that can capitalize on that demand and independently stay up to speed on changing exposures will reap the rewards.

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

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Improving the Claims Experience

Insureds and carriers agree that more communication can address common claims complaints.
By: | January 10, 2018 • 7 min read

Carriers today often argue that buying their insurance product is about much more than financial indemnity and peace of mind.

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Many insurers include a variety of risk management services and resources in their packages to position themselves as true risk partners who help clients build resiliency and prevent losses in the first place.

That’s all well and good. No company wants to experience a loss, after all. But even with the added value of all those services, the core purpose of insurance is to reimburse loss, and policyholders pay premiums because they expect delivery on that promise.

At the end of the day, nothing else matters if your insurer can’t or won’t pay your claim, and the quality of the claims experience is ultimately the barometer by which insureds will judge their insurer.

Why, then, is the process not smoother? Insureds want more transparency and faster claims payment, but claims examiners are often overburdened and disconnected from the original policy. Where does the disconnect come from, and how can it be bridged?

Both sides of the insurer-insured equation may be responsible.

Susan Hiteshew, senior manager of global insurance and risk management, Under Armor Inc.

“One of the difficult things in our industry is that oftentimes insureds don’t call their insurer until they have a claim,” said Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“It’s important to leverage all of the other value that insurers offer through mid-term touchpoints and open communication. This can help build the insurer-insured partnership so that when a claim materializes, the relationships are already established and the claim can be resolved quickly and fairly.”

“My experience has been that claims executives are often in the background until there is an issue that needs addressing with the policyholder,” said Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America.

“This is unfortunate because the claims department essentially writes the checks and they should certainly be involved in the day to day operations of the policyholders in designing polices that mitigate claims.

“By being in the shadows they often miss the opportunity to strengthen the relationship with policyholders.”

Communication Breakdown

Communication barriers may stem from internal separation between claims and underwriting teams. Prior to signing a contract and throughout a policy cycle, underwriters are often in contact with insureds to keep tabs on any changes in their risk profile and to help connect clients with risk engineering resources. Claims professionals are often left out of the loop, as if they have no proactive role to play in the insured-insurer relationship.

“Claims operates on their side of the house, ready to jump in, assist and manage when the loss occurs, and underwriting operates in their silo assessing the risk story,” Hiteshew said.
“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.”

Both insureds and claims professionals agree that most disputes could be solved faster or avoided completely if claims decision-makers interacted with policyholders early and often — not just when a loss occurs.

“Claims and underwriting need to be in lock-step to collectively provide maximum value to insureds, whether or not losses occur.” – Susan Hiteshew, senior manager of global insurance and risk management for Under Armour Inc.

“Communication is critically important and in my opinion, should take place prior to binding business and well before a claim comes in the door,” said David Crowe, senior vice president, claims, Berkshire Hathaway Specialty Insurance.

“In my experience, the vast majority of disputes boil down to lack of communication and most disputes ultimately are resolved when the claim decision-maker gets involved directly.”

Talent and Resource Shortage

Another contributing factor to fractured communication could be claims adjuster workload and turnover. Claims adjusting is stressful work to begin with.

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Adjusters normally deal with a high volume of cases, and each case can be emotionally draining. The customer on the other side is, after all, dealing with a loss and struggling to return to business as usual. At some TPAs, adjuster turnover can exceed 25 percent.

“This is a difficult time for claims organizations to find talent who want to be in this business long-term, and claims organizations need to invest in their employees if they’re going to have any success in retaining them,” said Patrick Walsh, executive vice president of York Risk Services Group.

The claims field — like the insurance industry as a whole — is also strained by a talent crunch. There may not be enough qualified candidates to take the place of examiners looking to retire in the next ten years.

“One of the biggest challenges facing the claims industry is a growing shortage of talent,” said Scott Rogers, president, National Accounts, Sedgwick. “This shortage is due to a combination of the number of claims professionals expected to retire in the coming years and an underdeveloped pipeline of talent in our marketplace.

“The lack of investment in ensuring a positive work environment, training, and technology for claims professionals is finally catching up to the industry.”

The pool of adjusters gets stretched even thinner in the aftermath of catastrophes — especially when a string of catastrophes occurs, as they did in the U.S in the third quarter of 2017.

“From an industry perspective, Harvey, Irma and Maria reminded us of the limitations on resources available when multiple catastrophes occur in close succession,” said Crowe.

“From independent and/or CAT adjusters to building consultants, restoration companies and contractors, resources became thin once Irma made landfall.”

Is Tech the Solution?

This is where Insurtech may help things. Automation of some processes could free up time for claims professionals, resulting in faster deployment of adjusters where they’re needed most and, ultimately, speedier claims payment.

“There is some really exciting work being done with artificial intelligence and blockchain technologies that could yield a meaningful ROI to both insureds and insurers,” Hiteshew said.

“The claim set-up process and coverage validation on some claims could be automated, which could allow adjusters to focus their work on more complex losses, expedite claim resolution and payment as well.”

Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Predictive modeling and analytics can also help claims examiners prioritize tasks and maximize productivity by flagging high-risk claims.

“We use our data to identify claims with the possibility of exceeding a specified high dollar amount in total incurred costs,” Rogers said. “If the model predicts that a claim will become a large loss, the claim is redirected to our complex claims unit. This allows us to focus appropriate resources that impact key areas like return to work.”

“York has implemented a number of models that are focused on helping the claims professional take action when it’s really required and that will have a positive impact on the claim experience,” Walsh said.

“We’ve implemented centers of excellence where our experts provide additional support and direction so claim professionals aren’t getting deluged with a bunch of predictive model alerts that they don’t understand.”

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners.” — Dan Holden, manager, Corporate Risk & Insurance, Daimler Trucks North America

Many technology platforms focused on claims management include client portals meant to improve the customer experience by facilitating claim submission and communication with examiners.

“With convenient, easy-to-use applications, claimants can send important documents and photos to their claims professionals, thereby accelerating the claims process. They can designate their communication preferences, whether it’s email, text message, etc.,” Sedgwick’s Rogers said. “Additionally, rules can be established that direct workflow and send real time notifications when triggered by specific claim events.”

However, many in the industry don’t expect technology to revolutionize claims management any time soon, and are quick to point out its downsides. Those include even less personal interaction and deteriorating customer service.

While they acknowledge that Insurtech has the potential to simplify and speed up the claims workflow, they emphasize that insurance is a “people business” and the key to improving the claims process lies in better, more proactive communication and strengthening of the insurer-insured relationship.

Additionally, automation is often a double-edged sword in terms of making work easier for the claims examiner.

“Technology can certainly expedite the claims process, but that could also lead to even more cases being heaped on examiners,” Holden said.

“So while the intent is to make things more streamlined for claims staff, the byproduct is that management assumes that examiners can now handle more files. If management carries that assumption too far, you risk diminishing returns and examiner burnout.”

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By further taking real people out of the equation and reducing personal interaction, Holden says technology also contributes to deteriorating customer service.

“When I started more than 30 years ago as a claims examiner, I asked a few of the seasoned examiners what they felt had changed since they began their own careers 30 year earlier. Their answer was unanimous: a decline in customer service,” Holden said.

“It fell to the wayside to be replaced by faster, more impersonal methodologies.”

Insurtech may improve customer satisfaction for simpler claims, allowing policyholders to upload images with the click of a button, automating claim valuation and fast-tracking payment. But for complex claims, where the value of an insurance policy really comes into play, tech may do more harm than good.

“Technology is an important tool and allows for more timely payment and processing of claims, but it is not THE answer,” BHSI’s Crowe said. “Behind all of the technology is people.” &

Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]