Cyber Risk

Companies Ill-Prepared to Deal With Cyber Attacks

Companies plan to boost spending on cyber security to deal with an onslaught of cyber attacks.
By: | February 22, 2017 • 4 min read

Despite a barrage of cyber attacks on businesses in the U.S. and abroad – with American firms targeted most often – more than half are ill-prepared to deal with the threat, according to a survey by specialist insurer Hiscox.

Cyber crime costs the global economy more than $450 billion in 2016, Hiscox said. Losses included business interruption and reputational damage to brand.

The findings show 72 percent of U.S. firms with 250 or more employees, and 68 percent of smaller American companies experienced a cyber incident within the past year.

Nearly half of the U.S. firms (47 percent) reported two or more incidents during the last year.

U.S. firms suffered the most serious and costly attacks even though nearly half of those businesses were ranked as “experts” by the survey in dealing with cyber threats.

Martin J. Frappolli, senior director of knowledge resources, The Institutes

Martin J. Frappolli, senior director of knowledge resources for The Institutes/Risk and Insurance Knowledge Group, said many organizations don’t fully recognize that “first party risks are just as big as third party risks and more commonly sources of lost revenue.”

“The biggest risk of cyber breach is the continuity of the business,” he said. Depending on the length of the business disruption, the loss of revenue, he said, could be financially devastating.

Another matter to keep in mind, Frappolli said, is the increased data sharing between firms, vendors and business partners. “The chain is only as strong as its weakest link.”

In the “Hiscox Cyber Readiness Report 2017,” U.S. firms reported their top cyber security challenges were the changing nature of threats, both internal and external.

To deal with them, 63 percent plan to increase spending on cyber security over the next year with the most money invested in technology, followed by training, cyber security, security staffing, other measures and outsourcing. Many plan to buy cyber insurance.

Technology is the top investment despite being the area where most firms appear to be best prepared.

“This isn’t necessarily about throwing money at technology. It’s about having a well-rounded strategy, process and resources,” said Dan Burke, vice president and cyber product head at Hiscox USA. “This is a human problem as much as it is a technology problem.”

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Training employees to recognize potential threats, such as phishing scams in emails, and having strong password management can go a long way toward cyber security, he said. Seven out of 10 respondents say training has reduced the number of business disruptions.

Emily Cummins, a member of the board of directors of RIMS, the Risk Management Society, and managing director of tax and risk management at the National Rifle Association, is a strong proponent of employee cyber risk training.

Emily Cummins, director of tax and risk management, National Rifle Association

“The No. 1 recommendation is always continuous training,” she said. “And that means year-round reinforcement because employees are a source of unintentional errors and training can prevent [breaches].”

Cummins said training done in collaboration with departments, divisions or teams and including top management presents a powerful message to employees that prevention is critical to the organization. She also recommends devising a breach, or disaster response plan and practicing it regularly.

Most survey respondents listed cyber insurance as a key priority, with 57 percent saying they intend to purchase or enhance cyber insurance coverage this year.

More U.S. firms (55 percent) have cyber insurance policies than companies in the U.K. (36 percent) and Germany (30 percent). Another 25 percent of U.S. firms said they plan to take out a policy this year.

Frappolli said a firm’s risk manager, or a good insurance broker, can help determine which type of policy is best, since there is no standard product. Choices include cyber liability policies, business interruption policies, first party coverages, and endorsements or riders to existing policies.

He advised firms to purchase insurance to fill in the gaps not covered by training and technology and to have a breach plan in place in the event a hack occurs.

“Use the whole toolbox,” Frappolli said. “Don’t just think ‘I want to buy insurance’ and I’m done.”

Released in February, “The Hiscox Cyber Readiness Report 2017” details the results of a survey of 3,000 firms according to their cyber readiness in four key areas — strategy, resourcing, technology and process — and ranks them from novice to expert. It includes their plans to combat the threat going forward and offers advice on how to best prevent and manage it.

Conducted by Forrester Consulting on behalf of Hiscox, the survey, taken in late 2016, questioned executives, managers and IT specialists in charge of cyber security at 1,000 companies of all sizes each from U.S., Germany and the U.K.

Jodi Spiegel Arthur is a long-time journalist. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Property

Insurers Take to the Skies

This year’s hurricane season sees the use of drones and other aerial intelligence gathering systems as insurers seek to estimate claims costs.
By: | November 1, 2017 • 6 min read

For Southern communities, current recovery efforts in the wake of Hurricane Harvey will recall the painful devastation of 2005, when Katrina and Wilma struck. But those who look skyward will notice one conspicuous difference this time around: drones.

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Much has changed since Katrina and Wilma, both economically and technologically. The insurance industry evolved as well. Drones and other visual intelligence systems (VIS) are set to play an increasing role in loss assessment, claims handling and underwriting.

Farmers Insurance, which announced in August it launched a fleet of drones to enhance weather-related property damage claim assessment, confirmed it deployed its fleet in the aftermath of Harvey.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now,” said George Mathew, CEO of Kespry, Farmers’ drone and aerial intelligence platform provider partner.

“The current wind and hail damage season that we are entering is when many of the insurance carriers are switching from proof of concept work to full production rollout.”

 According to Mathew, Farmers’ fleet focused on wind damage in and around Corpus Christi, Texas, at the time of this writing. “Additional work is already underway in the greater Houston area and will expand in the coming weeks and months,” he added.

No doubt other carriers have fleets in the air. AIG, for example, occupied the forefront of VIS since winning its drone operation license in 2015. It deployed drones to inspections sites in the U.S. and abroad, including stadiums, hotels, office buildings, private homes, construction sites and energy plants.

Claims Response

At present, insurers are primarily using VIS for CAT loss assessment. After a catastrophe, access is often prohibited or impossible. Drones allow access for assessing damage over potentially vast areas in a more cost-effective and time-sensitive manner than sending human inspectors with clipboards and cameras.

“Drones improve risk analysis by providing a more efficient alternative to capturing aerial photos from a sky-view. They allow insurers to rapidly assess the scope of damages and provide access that may not otherwise be available,” explained Chris Luck, national practice leader of Advocacy at JLT Specialty USA.

“The pent-up demand for drones, particularly from a claims-processing standpoint, has been accumulating for almost two years now.” — George Mathew, CEO, Kespry

“In our experience, competitive advantage is gained mostly by claims departments and third-party administrators. Having the capability to provide exact measurements and details from photos taken by drones allows insurers to expedite the claim processing time,” he added.

Indeed, as tech becomes more disruptive, insurers will increasingly seek to take advantage of VIS technologies to help them provide faster, more accurate and more efficient insurance solutions.

Duncan Ellis, U.S. property practice leader, Marsh

One way Farmers is differentiating its drone program is by employing its own FAA-licensed drone operators, who are also Farmers-trained claim representatives.

Keith Daly, E.V.P. and chief claims officer for Farmers Insurance, said when launching the program that this sets Farmers apart from most carriers, who typically engage third-party drone pilots to conduct evaluations.

“In the end, it’s all about the experience for the policyholder who has their claim adjudicated in the most expeditious manner possible,” said Mathew.

“The technology should simply work and just melt away into the background. That’s why we don’t just focus on building an industrial-grade drone, but a complete aerial intelligence platform for — in this case — claims management.”

Insurance Applications

Duncan Ellis, U.S. property practice leader at Marsh, believes that, while currently employed primarily to assess catastrophic damage, VIS will increasingly be employed to inspect standard property damage claims.

However, he admitted that at this stage they are better at identifying binary factors such as the area affected by a peril rather than complex assessments, since VIS cannot look inside structures nor assess their structural integrity.

“If a chemical plant suffers an explosion, it might be difficult to say whether the plant is fully or partially out of operation, for example, which would affect a business interruption claim dramatically.

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“But for simpler assessments, such as identifying how many houses or industrial units have been destroyed by a tornado, or how many rental cars in a lot have suffered hail damage from a storm, a VIS drone could do this easily, and the insurer can calculate its estimated losses from there,” he said.

In addition,VIS possess powerful applications for pre-loss risk assessment and underwriting. The high-end drones used by insurers can capture not just visual images, but mapping heat, moisture or 3D topography, among other variables.

This has clear applications in the assessment and completion of claims, but also in potentially mitigating risk before an event happens, and pricing insurance accordingly.

“VIS and drones will play an increasing underwriting support role as they can help underwriters get a better idea of the risk — a picture tells a thousand words and is so much better than a report,” said Ellis.

VIS images allow underwriters to see risks in real time, and to visually spot risk factors that could get overlooked using traditional checks or even mature visual technologies like satellites. For example, VIS could map thermal hotspots that could signal danger or poor maintenance at a chemical plant.

Chris Luck, national practice leader of Advocacy, JLT Specialty USA

“Risk and underwriting are very natural adjacencies, especially when high risk/high value policies are being underwritten,” said Mathew.

“We are in a transformational moment in insurance where claims processing, risk management and underwriting can be reimagined with entirely new sources of data. The drone just happens to be one of most compelling of those sources.”

Ellis added that drones also could be employed to monitor supplies in the marine, agriculture or oil sectors, for example, to ensure shipments, inventories and supply chains are running uninterrupted.

“However, we’re still mainly seeing insurers using VIS drones for loss assessment and estimates, and it’s not even clear how extensively they are using drones for that purpose at this point,” he noted.

“Insurers are experimenting with this technology, but given that some of the laws around drone use are still developing and restrictions are often placed on using drones [after] a CAT event, the extent to which VIS is being used is not made overly public.”

Drone inspections could raise liability risks of their own, particularly if undertaken in busy spaces in which they could cause human injury.

Privacy issues also are a potential stumbling block, so insurers are dipping their toes into the water carefully.

Risk Improvement

There is no doubt, however, that VIS use will increase among insurers.

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“Although our clients do not have tremendous experience utilizing drones, this technology is beneficial in many ways, from providing security monitoring of their perimeter to loss control inspections of areas that would otherwise require more costly inspections using heavy equipment or climbers,” said Luck.

In other words, drones could help insurance buyers spot weaknesses, mitigate risk and ultimately win more favorable coverage from their insurers.

“Some risks will see pricing and coverage improvements because the information and data provided by drones will put underwriters at ease and reduce uncertainty,” said Ellis.

The flip-side, he noted, is that there will be fewer places to hide for companies with poor risk management that may have been benefiting from underwriters not being able to access the full picture.

Either way, drones will increasingly help insurers differentiate good risks from bad. In time, they may also help insurance buyers differentiate between carriers, too. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]