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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.

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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.

Black Swan: EMP

Chaos From Above

An electromagnetic pulse event triggered by the detonation of a low-yield nuclear device in Earth’s atmosphere triggers economic and societal chaos.
By: | July 27, 2017 • 9 min read

Scenario

The vessel that seeks to undo America arrives in the teeth of a storm.

The 4,000-ton Indonesian freighter Pandawas Viper sails towards California in December 2017. It is shepherded toward North America by a fierce Pacific winter storm, a so-called “Pineapple Express,” boasting 15-foot waves and winds topping 70 mph.

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Normally, Pandawas Viper carries cargo containers. This time she harbors a much more potent payload.

Unbeknownst to U.S. defense and intelligence officials, the Viper carries a single nuclear weapon, loaded onto a naval surface-to-air missile, or SAM, concealed below deck.

The warhead has an involved history. It was smuggled out of Kyrgyzstan in 1997, eventually finding its way into the hands of Islamic militants in Indonesia that are loosely affiliated with ISIS.

Even for these ambitious and murderous militants, outfitting a freighter with a nuclear device in secrecy and equipping it to sail to North America in the hopes of firing its deadly payload is quite an undertaking.

Close to $2 million in bribes and other considerations are paid out to ensure that the Pandawas Viper sets sail for America unmolested, her cargo a secret held by less than two dozen extremist Islamic soldiers.

The storm is a perfect cover.

Officials along the West Coast busy themselves tracking the storm, doing what they think is the right thing by warning residents about flooding and landslides, and securing ports against storm-related damage.

No one gives a second thought to the freighter flying Indonesian colors making its way toward the Port of Long Beach, as it apparently should be.

It’s only at two in the morning on Sunday, December 22, that an alert Port of San Diego administrator charged with monitoring ocean-going cargo traffic sees something that causes him to do a double take.

GPS tracking information indicates to him that the Pandawas Viper is not heading to Long Beach, as indicated on its digital shipping logs, but is veering toward Baja, Calif.

Were it to keep its present course, it would arrive at Tijuana, Mexico.

The port administrator dutifully notifies the U.S. Coast Guard.

“Indonesian freighter Pandawas Viper off course, possibly storm-related navigational difficulties,” he emails on a secure digital communication channel operated by the port and the Coast Guard.

“Monitor and alert as necessary,” his message, including the ship’s current coordinates, concludes.

In turn, a communications officer in the Coast Guard’s Alameda, Calif. offices dutifully alerts members of the Coast Guard’s Pacific basin security team. She’s done her job but she’s about an hour late.

At 3:15 am Pacific time on December 22, the deck on the Pandawas Viper opens and the naval surface-to-air missile, operated remotely by a militant operative in Jakarta, is let loose.

It’s headed not for Los Angeles or San Diego, but rather Earth’s atmosphere, where it detonates about 50 miles above the surface.

There it interacts with the planet’s atmosphere, ionosphere and magnetic field to produce an electromagnetic pulse, or EMP, which radiates down to Earth, creating additional electric or ground-induced currents.

The operative’s aim is perfect. With a charge of hundreds and in some cases thousands of volts, the GICs cause severe physical damage to all unprotected electronics and transformers. Microchips operate in the range of 1.5 to 5 volts and thus are obliterated by the billions.

As a result, the current created by the blast knocks out 70 percent of the nation’s grid. What began as an overhead flash of light plunges much of the nation into darkness.

The first indication for most people that there is a problem is that their trusty cellphones can do no more than perform calculations, tell them the time or play their favorite tunes.

As minutes turn to hours, however, people realize that they’ve got much bigger concerns on their hands. Critical infrastructure for transportation and communications ceases. Telecommunication breakdowns mean that fire and police services are unreachable.

For the alone, the elderly and the otherwise vulnerable, panic sets in quickly.

Hospital administrators feverishly calculate how long their emergency power supplies can last.

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Supermarkets and other retailers anticipating one of their biggest shopping days of the year on that Monday, December 23, instead wake up to cold homes and chilling prospects.

Grocery stores with their electricity cut off are unable to open and product losses begin to mount. Banks don’t open. Cash machines are inoperable.

In the colder parts of the United States, the race to stay warm is on.  Within a day’s time in some poorer neighborhoods, furniture is broken up and ignited for kindling.

As a result, fires break out, fires that in many cases will not draw a response from firefighting crews due to the communication breakdown.

As days of interruption turn into weeks and months, starvation, rioting and disease take many.

Say good-bye to most of the commercial property/casualty insurance companies that you know. The resulting chaos adds up to more than $1 trillion in economic losses. Property, liability, credit, marine, space and aviation insurers fail in droves.

Assume widespread catastrophic transformer damage, long-term blackouts, lengthy restoration times and chronic shortages. It will take four to 10 years for a full recovery.

The crew which launched the naval surface-to-air missile that resulted in all of this chaos makes a clean getaway. All seven that were aboard the Pandawas Viper make their way to Ensenada, Mexico, about 85 miles south of San Diego via high-speed hovercraft.

Those that bankrolled this deadly trip were Muslim extremists. But this boat crew knows no religion other than gold.

Well-paid by their suppliers, they enjoy several rounds of the finest tequila Ensenada can offer, and a few other diversions, before slipping away to Chile, never to be brought to justice.

Observations

This outcome does not spring from the realm of fiction.

In May, 1999, during the NATO bombing of the former Yugoslavia, high-ranking Russian officials meeting with a U.S. delegation to discuss the Balkans conflict raised the notion of an EMP attack that would paralyze the United States.

That’s according to a report of a commission to assess the threat to the United States from an EMP attack, which was submitted to the U.S. Congress in 2004. But Russia is not alone in this threat or in this capability.

Wes Dupont, vice president and general counsel, Allied World Assurance Company

North Korea also has the capability and the desire, according to experts, and there is speculation that recent rocket launches by that country are dress rehearsals to detonate a nuclear device in our atmosphere and carry out an EMP attack on the United States.

The first defense against such an attack is our missile defense. But some experts believe this country is ill-equipped to defend against this sort of scenario.

“In terms of risk mitigation, if an event like this happens, then that means the best risk mitigation we have has already failed, which would be our military defense systems, because the terrorists have already launched their weapon, and it’s already exploded,” said Wes Dupont, a vice president and general counsel with the Allied World Assurance Company.

The U.S power grid is relatively unprotected against EMP blasts, Dupont said.

And a nuclear blast is the worst that can occur. There isn’t much mitigation that’s been done because many methods are unproven, and it’s expensive, he added.

Lloyd’s and others have studied coronal mass ejections, solar superstorms that would produce a magnetic field that could enter our atmosphere and wipe out our grid.  Scientists believe that an EMP attack would carry a force far greater than any coronal mass ejection that has ever been measured.

An extended blackout, with some facilities taking years to return to full functionality, is a scenario that no society on earth is ready for.

“Traditional scenarios only assume blackouts for a few days and losses seem to be moderate …” wrote executives with Allianz in a 2011 paper outlining risk management options for power blackout risks.

“If an event like this happens, then that means the best risk mitigation we have has already failed … because the terrorists have already launched their weapon, and it’s already exploded.” — Wes Dupont, vice president and general counsel, Allied World Assurance Company

“But if we are considering longer-lasting blackouts, which are most likely from space weather or coordinated cyber or terrorist attacks, the impacts to our society and economy might be significant,” the Allianz executives wrote.

“Critical infrastructure such as communication and transport would be hampered,” the Allianz executives wrote.

“The heating and water supply would stop, and production processes and trading would cease. Emergency services like fire, police or ambulance could not be called due to the breakdown of the telecommunications systems. Hospitals would only be able to work as long as the emergency power supply is supplied with fuel. Financial trading, cash machines and supermarkets in turn would have to close down, which would ultimately cause a catastrophic scenario,” according to Allianz.

It would cost tens of billions to harden utility towers in this country so that they wouldn’t be rendered inoperable by ground-induced currents. That may seem like a lot of money, but it’s really not when we think about the trillion dollars or more in damages that could result from an EMP attack, not to mention the loss of life.

Allianz estimates that when a blackout is underway, financial trading institutions, for example, suffer losses of more than $6 million an hour; telecommunications companies lose about $30,000 per minute, according to the Allianz analysis.

Insurers, of course, would be buffeted should a rogue actor pull off this attack.

Lou Gritzo, vice president and manager of research, FM Global

“Depending on the industries and the locations that are affected, it could really change the marketplace, insurers and reinsurers as well,” said Lou Gritzo, a vice president and manager of research at FM Global.

Gritzo said key practices to defend against this type of event are analyzing supply chains to establish geographically diverse supplier options and having back-up systems for vital operations.

The EMP commission of 2004 argued that the U.S. needs to be vigilant and punish with extreme prejudice rogue entities that are endeavoring to obtain the kind of weapon that could be used in an attack like this.

It also argued that we need to protect our critical infrastructure, carry out research to better understand the effects of such an attack, and create a systematic recovery plan. Understanding the condition of critical infrastructure in the wake of an attack and being able to communicate it will be key, the commission argued.

The commission pointed to a blackout in the Midwest in 2003, in which key system operators did not have an alarm system and had little information on the changing condition of their assets as the blackout unfolded.

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The commission’s point is that we have the resources to defend against this scenario. But we must focus on the gravity of the threat and employ those resources.

Our interconnected society and the steady increase in technology investment only magnify this risk on a weekly basis.

“Our vulnerability is increasing daily as our use of and dependence on electronics continues to grow,” the EMP commission members wrote back in 2004.

But “correction is feasible and well within the nation’s means and resources to accomplish,” the commission study authors wrote. &

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