Brokers Beware: Cyber Risk 2.0
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
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.”
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.
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.