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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.

Risk Report: Manufacturing

More Robots Enter Into Manufacturing Industry

With more jobs utilizing technology advancements, manufacturing turns to cobots to help ease talent gaps.
By: | May 1, 2018 • 6 min read

The U.S. manufacturing industry is at a crossroads.

Faced with a shortfall of as many as two million workers between now and 2025, the sector needs to either reinvent itself by making it a more attractive career choice for college and high school graduates or face extinction. It also needs to shed its image as a dull, unfashionable place to work, where employees are stuck in dead-end repetitive jobs.

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Added to that are the multiple risks caused by the increasing use of automation, sensors and collaborative robots (cobots) in the manufacturing process, including product defects and worker injuries. That’s not to mention the increased exposure to cyber attacks as manufacturers and their facilities become more globally interconnected through the use of smart technology.

If the industry wishes to continue to move forward at its current rapid pace, then manufacturers need to work with schools, governments and the community to provide educational outreach and apprenticeship programs. They must change the perception of the industry and attract new talent. They also need to understand and to mitigate the risks presented by the increased use of technology in the manufacturing process.

“Loss of knowledge due to movement of experienced workers, negative perception of the manufacturing industry and shortages of STEM (science, technology, engineering and math) and skilled production workers are driving the talent gap,” said Ben Dollar, principal, Deloitte Consulting.

“The risks associated with this are broad and span the entire value chain — [including]  limitations to innovation, product development, meeting production goals, developing suppliers, meeting customer demand and quality.”

The Talent Gap

Manufacturing companies are rapidly expanding. With too few skilled workers coming in to fill newly created positions, the talent gap is widening. That has been exacerbated by the gradual drain of knowledge and expertise as baby boomers retire and a decline in technical education programs in public high schools.

Ben Dollar, principal, Deloitte Consulting

“Most of the millennials want to work for an Amazon, Google or Yahoo, because they seem like fun places to work and there’s a real sense of community involvement,” said Dan Holden, manager of corporate risk and insurance, Daimler Trucks North America. “In contrast, the manufacturing industry represents the ‘old school’ where your father and grandfather used to work.

“But nothing could be further from the truth: We offer almost limitless opportunities in engineering and IT, working in fields such as electric cars and autonomous driving.”

To dispel this myth, Holden said Daimler’s Educational Outreach Program assists qualified organizations that support public high school educational programs in STEM, CTE (career technical education) and skilled trades’ career development.

It also runs weeklong technology schools in its manufacturing facilities to encourage students to consider manufacturing as a vocation, he said.

“It’s all essentially a way of introducing ourselves to the younger generation and to present them with an alternative and rewarding career choice,” he said. “It also gives us the opportunity to get across the message that just because we make heavy duty equipment doesn’t mean we can’t be a fun and educational place to work.”

Rise of the Cobot

Automation undoubtedly helps manufacturers increase output and improve efficiency by streamlining production lines. But it’s fraught with its own set of risks, including technical failure, a compromised manufacturing process or worse — shutting down entire assembly lines.

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More technologically advanced machines also require more skilled workers to operate and maintain them. Their absence can in turn hinder the development of new manufacturing products and processes.

Christina Villena, vice president of risk solutions, The Hanover Insurance Group, said the main risk of using cobots is bodily injury to their human coworkers. These cobots are robots that share a physical workspace and interact with humans. To overcome the problem of potential injury, Villena said, cobots are placed in safety cages or use force-limited technology to prevent hazardous contact.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them.” — David Carlson, U.S. manufacturing and automobile practice leader, Marsh

“Technology must be in place to prevent cobots from exerting excessive force against a human or exposing them to hazardous tools or chemicals,” she said. “Traditional robots operate within a safety cage to prevent dangerous contact. Failure or absence of these guards has led to injuries and even fatalities.”

The increasing use of interconnected devices and the Cloud to control and collect data from industrial control systems can also leave manufacturers exposed to hacking, said David Carlson, Marsh’s U.S. manufacturing and automobile practice leader. Given the relatively new nature of cyber as a risk, however, he said coverage is still a gray area that must be assessed further.

“With advancements in technology, such as the Cloud, there are going to be a host of cyber and other risks associated with them,” he said. “Therefore, companies need to think beyond the traditional risks, such as workers’ compensation and product liability.”

Another threat, said Bill Spiers, vice president, risk control consulting practice leader, Lockton Companies, is any malfunction of the software used to operate cobots. Then there is the machine not being able to cope with the increased workload when production is ramped up, he said.

“If your software goes wrong, it can stop the machine working or indeed the whole manufacturing process,” he said. “[Or] you might have a worker who is paid by how much they can produce in an hour who decides to turn up the dial, causing the machine to go into overdrive and malfunction.”

Potential Solutions

Spiers said risk managers need to produce a heatmap of their potential exposures in the workplace attached to the use of cobots in the manufacturing process, including safety and business interruption. This can also extend to cyber liability, he said.

“You need to understand the risk, if it’s controllable and, indeed, if it’s insurable,” he said. “By carrying out a full risk assessment, you can determine all of the relevant issues and prioritize them accordingly.”

By using collective learning to understand these issues, Joseph Mayo, president, JW Mayo Consulting, said companies can improve their safety and manufacturing processes.

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it.” — Joseph Mayo, president, JW Mayo Consulting

“Companies need to work collaboratively as an industry to understand this new technology and the problems associated with it,” Mayo said. “They can also use detective controls to anticipate these issues and react accordingly by ensuring they have the appropriate controls and coverage in place to deal with them.”

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Manufacturing risks today extend beyond traditional coverage, like workers’ compensation, property, equipment breakdown, automobile, general liability and business interruption, to new risks, such as cyber liability.

It’s key to use a specialized broker and carrier with extensive knowledge and experience of the industry’s unique risks.

Stacie Graham, senior vice president and general manager, Liberty Mutual’s national insurance central division, said there are five key steps companies need to take to protect themselves and their employees against these risks. They include teaching them how to use the equipment properly, maintaining the same high quality of product and having a back-up location, as well as having the right contractual insurance policy language in place and plugging any potential coverage gaps.

“Risk managers need to work closely with their broker and carrier to make sure that they have the right contractual controls in place,” she said. “Secondly, they need to carry out on-site visits to make sure that they have the right safety practices and to identify the potential claims that they need to mitigate against.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]