Sponsored: Starr Companies

Brokers Beware: Cyber Risk 2.0

As businesses grow more dependent on technology to carry out all of their core functions, cyber risk becomes an operational risk.
By: | May 10, 2017 • 6 min read

Two traditional aspects of cyber risk are privacy risk and network security.

In essence, privacy risk is as follows: Companies responsible for storing customers’ personally identifiable information may be held liable if the information is stolen or exposed. Insurers and risk management vendors have solutions to deal with privacy risk, and many risk managers understand the value of having incident response plans in the event of a breach.

But the consequences of a network security failure stretch beyond data privacy, with sometimes severe impact on operations.

“This is what makes cyber risk so dynamic. People always associate cyber with data, but new risks are emerging presented by the Internet of Things and the interconnectedness of multiple technology systems,” said Shiraz Saeed, National Practice Leader, Cyber Risk, Starr Companies. “These present unforeseen consequences in terms of the type of damage done, and raise questions over which insurance coverages apply.”

Brokers have to be knowledgeable about the full scope of cyber risk – including these emerging exposures – and be able to explain it holistically to educate insureds.

“Mature” Cyber Risks

Shiraz Saeed, National Practice Leader, Cyber Risk

Most carriers committed to cyber risk are familiar with non-physical cyber exposures, like protection of sensitive data. In fact, privacy and data security can now be considered “mature” cyber risks because the industry has experience dealing with the aftermath of a breach or hack, including notification procedures, forensic investigation, credit monitoring, legal advice and public relations damage control.

Expenses related to these reactive measures are normally covered under traditional cyber policies.

“The reputable and committed carriers in this space can respond to a network security failure, whether it’s proven or reasonably suspected, depending on the type of coverage an insured has purchased. The failure could be a malicious hack, or an accidental breach,” said Saeed.

So regardless of whether a company fell victim to a malicious denial-of-service attack, or if an employee simply misplaced their corporate cellphone, a cyber policy will likely cover the non-physical damages related to the data loss. The coverage may also include determining how systems were compromised and even any business income loss that results.

But there are consequences to compromised security beyond the loss of data or private information.

“The common reaction when you hear ‘cyber risk’ is to automatically associate it with privacy and network security. But what happens when there is no privacy issue and only network security? What other risks are introduced by a failure of your system security?” Saeed said.

Cyber 2.0: Physical Threats

As businesses grow more dependent on technology to carry out all of their core functions – and as these systems grow more interconnected through the ever-expanding Internet of Things – cyber risk becomes an operational risk.

“Technology is integrated into everything,” Saeed said. “Manufacturers, energy providers, transportation companies – you would be hard-pressed to find an industry that does not rely on computer systems to do business.”

Physical damage from cyber events is a growing concern that the insurance industry is trying to wrap its arms around because it can trigger multiple property/casualty policies, and the root cause of the event may not be easily discernable.

Consider the following hypothetical scenario: There is a high rise building with a computer-operated elevator system. What would happen if there is a network security failure, and the elevator free-falls several stories, killing two people? As a result of this hypothetical occurrence, there is $5 million in property damage to the building plus another $5 million in wrongful death lawsuits.

It may take weeks of investigation to determine that a network security failure was the triggering event. In the meantime, the property owner and elevator manufacturer may turn to property, general liability, and product liability policies to recoup their losses.

“An ‘accident’ or ‘occurrence’ is normally the trigger for a general liability or property policy. In the elevator example, the elevator collapse is the accident or occurrence, but the cause was a network security failure. How then will an insurance program respond? The insurance industry needs to move in the direction of determining if a network security failure should qualify as the cause of the accident or occurrence, in mainstream property and casualty insurance programs.” Saeed said.

Autonomous vehicles offer another example. If a self-driving car gets involved in an accident, it should be determined whether the crash was caused by a malfunction or hack of the car’s software.

“Will a commercial auto policy cover it, or cyber? How would a product liability policy respond to a malfunction versus an intentional hack? What if there is bodily injury in addition to property damage?” Saeed said.

“The question is – who do you represent, the car manufacturer or the insurance company or the software developer? What are you trying to protect or recoup in terms of losses and what is the primary cause of those losses physical or non-physical damage? These are questions that the insurance industry needs to gain clarity around.”

Coverage Challenges

Determining where cyber policies intersect with other property and casualty coverages is an important challenge for the insurance industry, including both for brokers and carriers.

“Brokers have to go back to the basics and analyze the root causes of incidents to determine what coverage applies. Delete cyber from your mind and think about the event in a different context. What was the accident or occurrence? What caused it? And what are we trying to recover?” he said.

Allocating coverage will come down to the exclusions and specific language of cyber and other property and casualty policies. Cyber policies may specifically exclude physical damage resulting from a hack or malfunction; but a property policy may not exclude a network failure as a triggering event.

Examining policy language can help brokers and insureds identify the gaps and overlaps.

“One challenge is that network security failures – and especially physical damages from network security failures – have a limited loss history, so they can’t be modeled or predicted effectively,” Saeed said. “That makes it harder for the property and casualty world to gain a firm understanding of the breadth of cyber risk.”

As loss history develops, the industry will get better at defining when a loss – whether physical or non-physical – is considered a cyber event, which policies respond, and how those coverages interact and overlap with each other. In the near future, more property and casualty policies will likely evolve to cover physical damages from cyber incidents.

“In the meantime, Starr is working on cyber solutions to address the intersection of different risks from a holistic perspective. We anticipate providing a broad based solution in the near future,” Saeed said.

Starr recently developed a new primary cyber program called Cyber Risk Response. This coverage addresses the various non-physical damages from network security failures and privacy incidents. Further, under certain circumstances, the coverage can also extend to the physical damage exposure on a contingent basis.

This should provide organizations a temporary solution for now, while the industry works to streamline cyber risk transfer across property and casualty going forward.

For more information on Starr Companies’ cyber products and services, visit http://www.starrcompanies.com/insurance/cyberoverview.

SponsoredContent

BrandStudioLogo

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.




Starr Companies is a global commercial insurance and financial services organization that provides innovative risk management solutions.

Risk Management

The Profession

Verizon’s risk manager David Cammarata loves when his team can make a real impact on the bottom line.
By: | May 2, 2017 • 4 min read

R&I: What was your first job?

I was a financial analyst with the N.J. Casino Control Commission.

R&I: How did you come to work in risk management?

I was told at a Christmas luncheon in 2003 that I was being promoted into a new job.

R&I: What is the risk management community doing right?

Advertisement




I think the risk management community is getting a lot better at utilizing big data and analytics to manage risk. Significant improvements have been made, but there is still much more room for improvement.

R&I: What could the risk management community be doing a better job of?

I think that the insurance and brokerage communities need to really start thinking about what this industry is going to look like in 10 years. They need to start addressing how they are going to remain relevant. I think that major disruptions to existing business models will occur and that these disruptions combined with innovation and technological advances may catch many of today’s industry leaders by surprise.

David Cammarata, assistant treasurer, risk management and insurance, Verizon Communications Inc.

R&I: What was the best location and year for the RIMS conference and why?

San Diego, any year.

R&I: What’s been the biggest change in the risk management and insurance industry since you’ve been in it?

I think the advent of cyber risk and cyber insurance. For several years it has been, and it continues to be, the main topic of discussion at industry meetings.

R&I: What emerging commercial risk most concerns you?

Advertisement




Advertisement




I think the most scary scenarios include a nuclear, biological, chemical or radiological event, a widespread global health epidemic and/or a widespread state sponsored cyber shutdown.

R&I: How much business do you do direct versus going through a broker?

We do almost all of our business through a broker.

R&I: Is the contingent commission controversy overblown?

No. It’s a conflict.

R&I: Are you optimistic about the U.S. economy or pessimistic and why?

Optimistic because hopefully President Trump’s policies (lower taxes and less regulation) will be pro-business and good for the economy.

R&I: Who is your mentor and why?

My dad, who passed away many years ago. He was very influential during the formative years of my career. He taught me how important integrity and reputation were to your brand and he had a very strong work ethic.

R&I: What have you accomplished that you are proudest of?

I would have to say raising two awesome kids. My daughter is graduating from James Madison University this year as co-valedictorian. My son is finishing his sophomore year at Rutgers and has near perfect grades. But more importantly, both of my kids have turned out to be really good people.

R&I: How many emails do you get in a day?

A lot.

“I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.”

R&I: What is your favorite book or movie?

“My Cousin Vinny.” That movie makes me laugh no matter how many times I watch it.

R&I: What’s the best restaurant you’ve ever eaten at?

Advertisement




Advertisement




My dad used to take me to a place called Chick & Nello’s. It was an Italian place that did not have a menu. They came to your table and told you the two or three items they were making that day. The food was out of this world.

R&I: What is your favorite drink?

Iced tea. The non-alcoholic kind.

R&I: What is the most unusual/interesting place you have ever visited?

I can think of several places but for me it would be a tie between India and Italy. India just has such a different culture and way of life and Rome has breathtaking historical sites.

R&I: What is the riskiest activity you ever engaged in?

Well, one of the best thrill rides I’ve been on was Kingda Ka at Great Adventure. It feels risky but probably isn’t all that risky. I flew in a prop plane with my brother-in-law one time … that felt kind of risky. I have also parasailed, does that count? I think it definitely has to be driving on the N.J. Turnpike day in and day out.

R&I: If the world has a modern hero, who is it and why?

Advertisement




What about the Fukushima 50? I don’t think I could have done what they did.

R&I: What about this work do you find the most fulfilling or rewarding?

I love it when the risk management organization is able to contribute in a way that makes a real impact to the corporation’s overall objectives. On several occasions we have been able to make real contributions to the bottom line.

R&I: What do your friends and family think you do?

I don’t think they really know. My children see me as dad; others just see me as an executive with Verizon.




Katie Siegel is a staff writer at Risk & Insurance®. She can be reached at [email protected]