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A Coordinated Defense to Cyber Risk

It’s time to start thinking about cyber risk in a coordinated, cohesive fashion.
By: | May 1, 2017 • 6 min read

Cyber risk is an amorphous threat that demands a coordinated defense from companies, their insurance carriers, and security and privacy professionals.

The exposure is multifaceted, varies from business to business, and continues to evolve. In addition to purchasing cyber insurance, companies can bolster their defenses against this risk by conducting targeted risk assessments and implementing appropriate security controls — but the challenge lies in identifying which security programs and controls an organization needs most, and which vendors provide the best service.

All companies, but especially small- to medium-sized businesses with more limited resources, want to see improvement of their risk profiles translate into discounted insurance premiums.

However, lack of alignment between IT security vendors and underwriters can make that connection difficult to attain, minimizing the value of loss control services. Current underwriting processes typically don’t allow underwriters the opportunity to ask insureds many questions about their security and privacy improvements, and vendors often view insurance as a separate offering, if not an afterthought.

“Part of the challenge has been that you have two different industries — IT security and insurance — working in siloes to address a singular risk challenge. Naturally, security professionals think about risk and control mechanisms differently than insurance professionals, and speak different languages,” said Tom Kang, enterprise cyber underwriting & product lead at The Hartford.

“We believe aligning the solutions — between security and insurance — and providing the right incentives to our clients can make a real difference. A fully integrated solution, with discounts for the service and the insurance, can offer something compelling and help improve cyber risk for our clients.”

It’s time to start thinking about cyber risk in a coordinated, cohesive fashion.

“We believe aligning the solutions – between security and insurance – and providing the right incentives to our clients can make a real difference.”
— Tom Kang, enterprise cyber underwriting & product lead, The Hartford

Connecting Risk Control and Underwriting

“Because cyber risk was emerging so quickly, insureds were often on their own when it came to risk control, underwriters were evaluating an emerging risk and hoping they got it right, and then claims were their own animal,” said Tim Marlin, head of cyber underwriting at Hartford Financial Products.

“But now that the risk is more mature, our views need to mature as well. As we gather more claims data, the industry needs to implement a better, more coordinated strategy than the ad hoc approach that often prevails. Risk control, underwriting and claim response should be thought of as parts of a continuum.”

Insurers play a key role in driving best practices and can help clients align every part of their cyber risk strategy. By thinking through their risk holistically, insurers can help buyers identify their key exposures, establish internal risk mitigation, transfer the risk through cyber insurance, and respond to a breach.

“Insurers themselves have a marketwide view of the risk from underwriting and claims data and benchmarking,” Kang said. “They can help insureds understand whether they are doing the right thing when it comes to identifying and securing their critical assets, complying with a dizzying array of regulations in this space, and direct them to the right resources.”

Many insurers make recommendations on well-vetted service providers, but traditionally there has not been a high rate of engagement because insureds could not see how those services impact their cost of insurance.

“Most insureds and brokers want to see their investment in these services have some kind of impact on premium, and historically insurers have not had much of a response,” Marlin said. “Some provide value-added services packaged with the policy. But including those services doesn’t generally move the premium or risk mitigation needle in any material way for organizations, whether they are mid-sized or large.”

The Hartford goes a step further beyond just finding the best vendors in the business. If clients use approved service providers and services, they can report it to The Hartford’s underwriters, who will factor the risk controls into calculations of the insurance premium.

“These are vendors we trust to help our clients get better at managing cyber risk,” Marlin said. “If they are strengthening their security, it feeds directly into our underwriting process and results in a premium incentive.”

By connecting the use of risk control services to insurance cost savings, The Hartford incentivizes clients to implement best practices in cyber risk mitigation and reduce their exposure to loss.

“An insurance policy should help you get better. Not just on the front end before there’s a claim, but after a claim as well.”
— Tim Marlin, head of cyber underwriting, Hartford Financial Products

From Coverage to Breach Response

Carriers can also work more closely with brokers and insureds to help them determine what the most appropriate coverage is for their particular business. An organization’s size and function both influence what type of coverage is required.

Small and mid-sized companies with limited resources, for example, may be less inclined to purchase a mono-line cyber product than to embed coverage within a different policy, like General Liability or E&O — where cyber coverage originated.

“When you think about the risk holistically, you can more thoughtfully plan what risk you will retain, mitigate or transfer. Part of thinking about the risk holistically also includes developing a robust cyber incident response plan, and thinking carefully about recovery and necessary improvements,” Kang said.

Beyond the traditional response services that are often included in cyber insurance policies and the claims process, policyholders should think about remediating the privacy or security issue that led to the claim.

That’s why The Hartford offers a cyber security expense fund as an additional endorsement on its CyberChoice First ResponseSM product. While the policy will help cover the costs of an incident response, the fund will help to cover the costs of remediation after the claim.

“Coverage typically stops at the claim. But we wanted to go a step further. Similar to pre-breach services, the fund can be used to strengthen those vulnerabilities that were targeted in the event,” Marlin said. “Perhaps more than pre-breach services, we believe engaging the insured after a claim is the best time to help them get better. They have had a loss and they understand very specifically what vulnerabilities they have and the impact of the exploit. No one else in the market offers a coverage like this.

“An insurance policy should help you get better. Not just on the front end before there’s a claim, but after a claim as well. We help clients get stronger through every part of the cyber risk management continuum.”

FOR PRODUCERS ONLY. CyberChoice First Response is offered on a SURPLUS LINES* basis. This material is not to be used for solicitation purposes. The Hartford has arranged for data risk management services for our policyholders at a discount from some third-party service providers. Such service providers are independent contractors and not agents of The Hartford. The Hartford does not warrant the performance of third-party service providers even if paid for as part of the policy coverage, and disclaims all liability with respect to use of or reliance on such third-party service providers.

*Eligibility for surplus insurance coverage is subject to state regulation and requires the use of a licensed surplus lines broker. Surplus lines insurance policies are generally not protected by state guaranty funds. Policies should be examined carefully for suitability and to identify all exclusions, limitations, and other terms and conditions. Surplus lines coverage is underwritten by Pacific Ins. Co. Ltd (except in CT and HI) and The Hartford Ins. Co. of Illinois in CT and HI. The Hartford® is The Hartford Financial Services Group, Inc. and its subsidiaries. Its headquarters is in Hartford, CT. All rights reserved.



This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with The Hartford. The editorial staff of Risk & Insurance had no role in its preparation.

The Hartford is a leader in property and casualty insurance, group benefits and mutual funds. With more than 200 years of expertise, The Hartford is widely recognized for its service excellence, sustainability practices, trust and integrity.

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of gtnews.com. He can be reached at riskletters.com.