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2017 Most Dangerous Emerging Risks

Cyber Business Interruption

Attacks on internet infrastructure commence, leaving unknown risks for insureds and insurers alike.
By: | April 7, 2017 • 8 min read

There are more than a billion websites on the internet but they rely on just a handful of companies to keep them operating.

Confidence in the system’s resilience declined significantly in October 2016, when a massive distributed denial of service (DDoS) attack assaulted Dyn, a company that controls much of the internet infrastructure.

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That DDoS attack, in turn, brought down major sites including Netflix, CNN, Spotify, Airbnb, Twitter and many others in Europe and the U.S.

“At this point we know this was a sophisticated, highly distributed attack involving tens of millions of IP addresses … across multiple attack vectors and internet locations,” said Kyle York, Dyn’s chief strategy officer on Oct. 21.

The attacks originated from Mirai-based botnets via internet-connected DVRs, video cameras and devices. Those attacks substantially disrupted service at the managed DNS (domain name system) infrastructure for about two hours from about 11 a.m. to 1 p.m. GMT, and again from about 4 to 5 p.m. GMT, with residual impact until about 8:30 p.m. on Oct. 21.

Then, to add more uncertainty, came the outages on Feb. 28 connected to Amazon Web Services. Although this was due to human error — apparently a coding error — rather than maliciousness, the result was the same: Companies, large and small, including Netflix, Airbnb, the Securities and Exchange Commission and Expedia, became inaccessible or their sites ran like molasses.

The problem, affecting mostly the East Coast, lasted from about 12:30 p.m. to about 4 p.m. ET.

“I definitely think [internet outages] will continue to happen,” said Nick Economidis, underwriter at Beazley. “I think there are some unknown risks out there.

“We are dealing with new exposures and new risks that we don’t have the background for, and I think there are going to be some surprises. … I think Dyn caught a lot of people’s attention.”

Dan Burke, vice president and cyber product head at Hiscox USA, agreed.

Fred Eslami, senior financial analyst, property and casualty, A.M. Best

“I think this is an attack vector we will continue to see for the foreseeable future, based on the ease in which one can initiate such attacks. … Just the sheer volume of devices that can be compromised and used to launch these attacks — there are such economies of scale in this space that we will continue to see this happen,” he said.

Such broad internet outages affect insureds and insurers alike, and the potential downside could be devastating.

For insureds, it’s the concern that their losses, which could last for months after an outage, will not trigger coverage in their policies. For insurers, it’s the fear of a catastrophic accumulation of cyber exposures.

Low Limits or Lack of Coverage

Steve Bridges, senior vice president of cyber risk and E&O, JLT Specialty USA, said that for many companies, a business interruption loss due to an outage at a cloud partner or ISP would only be covered if caused by a security failure and then only with a sublimit under most cyber policies.

The reason? Fear of risk aggregation, he said. “[Insurers] could have a catastrophic loss across industries and a bunch of different policies,” Bridges said.

“The cyber insurance marketplace is starting to extend contingent/dependent business interruption to include system failure triggers and to offer higher limits, but is wary about the impact of these aggregate loss situations,” he said.

For companies that offer significant CBI coverage, an extended cyber event affecting an ISP or cloud provider could result in them paying huge claims to their insureds resulting from an event affecting a company they didn’t underwrite or insure, Bridges said.

And with the lack of standardization of cyber policies, many insureds are uncertain if they even have coverage.

Plus, insurers have limited experience adjusting cyber BI or CBI claims. There haven’t been that many, and adjusting them is quite different than data breach or privacy claims that have become more common.

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There is a lot of skepticism that companies will be able to successfully resolve a cyber BI or CBI claim should they face a cyber-related disruption, said Adam Thomas, principal with Deloitte’s cyber risk services team, and co-author of “Demystifying Cyber Insurance Coverage.”

“Many insurers have tunnel vision when it comes to writing cyber policies, focusing primarily on marketing cyber products for personally identifiable data hacks and business disruption while not offering insurance for the many other cyber risks that companies face,” the report said.

While some insurers and brokers have worked with insureds to help them understand where exposures exist, Thomas said, uncertainty — primarily due to lack of good data — is common.

He noted that coverage is often ultimately decided by court decisions and there is not yet definitive case law relating to this type of claim.

Burke at Hiscox said that CBI coverage is traditionally found in the policies of larger insureds and is making its way down market to smaller insureds. Some policies may offer sublimited coverage for all service providers, while others may provide coverage only for providers specifically named by the insured.

Regardless, “it has been difficult to prove” a BI or CBI loss, he said.

Often, coverage is not triggered until a designated waiting period, typically eight to 12 hours. Plus, it is difficult even in a property-related BI claim to quantify losses during the event or time of restoration, let alone a cyber BI claim. It requires the expertise of a forensic accountant.

“Because Dyn was down only three hours [during the second attack of the day], there was very little insurance loss,” said Scott Stransky, assistant vice president and principal scientist at AIR Worldwide, although the economic loss was more than $100 million.

“If Dyn had been down for a day, it would not only result in billions in economic loss, but in significant insurance losses,” he said.

Companies face additional insurance issues if their websites don’t soon regain profitability.

Linking the recovery of lost revenue after the site comes back online is a challenge. There are other factors that could explain relatively poor performance, said JLT’s Bridges.

Typically, policies provide 60 to 90 days as the period of restoration, but for some companies, it can arguably be much longer before their customers return and revenue returns to expected levels.

Bigger companies that use cloud services from providers such as Amazon, Google, Rackspace, IBM or Microsoft, may have some leverage to contractually negotiate responsibility for losses over a certain amount, Bridges said. Small companies, not so much.

Risk Aggregation Fears

“I’m not getting a feeling that insurance companies themselves have a good idea of how to aggregate these [cyber] exposures,” said Fred Eslami, senior financial analyst, property and casualty, A.M. Best.

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“It is scary,” he said, noting that when Dyn was attacked, about 70 companies were affected, with service lost for several hours on different occasions in a 24-hour period.

“I’ve been trying to get information on what the damage was, particularly in terms of business interruption,” he said.

“There is no information right now. I hear companies are working on it since October. But it’s apparently a challenging task to come up with an idea of what the damage was.”

Imagine, he said, if the attack lasted 24 hours and affected hundreds of companies. Insurance companies have “no actuarial or results-oriented data they can depend on to do their proper pricing or proper reserving.”

They may face claims from cyber policies as well as general liability, D&O, E&O or policy packages.

A comparable example might be Hurricane Andrew, which struck Florida and Louisiana in 1992 and drove 12 insurance companies out of business, AIR’s Stransky said.

Although many insurers are working to solve the risk aggregation issue, they remain uncertain what percentage of their book uses specific ISPs or cloud providers, he said, and there’s no easy way to determine that.

Adam Thomas, principal, cyber risk services team, Deloitte

Thomas at Deloitte said accumulated risk “is an area that’s been a hot issue for senior management at most insurers. There is a general level of discomfort over how well — or not well — they understand where the cyber-accumulated risk sits.”

“Some insurers may fear being overwhelmed by a sudden aggregation of losses in which a third-party provider or cloud computing vendor that works with a wide swath of businesses gets hacked and leads to service failures for all of its users,” according to Deloitte’s report on demystifying coverage.

“This sort of systemic event could spell chaos for the insurance industry,” it said.

“Insurers should consider implementing more rigorous underwriting policies to start minimizing aggregation risk.”

“The exposure [for insurers],” said Burke at Hiscox, “can aggregate so quickly and be so massive that I think it has the potential to put insurance company balance sheets at risk.”

Some companies, like AIR Worldwide and RMS, are creating models to help insurers understand their exposure.

Stransky said the AIR model analyzes an insurance company’s portfolio to look at the aggregation risk, using specific company policy inclusions and exclusions.

Burke said Hiscox creates its own scenarios and models them with the help of third-party providers.

Lloyd’s issued an oversight framework two years ago that requires all syndicates, including Hiscox and Beazley, to have a “specific risk appetite for exposure to cyber attack across all classes of business.”

Recently, the New York State Department of Financial Services (DFS) released cyber security requirements for all companies that operate in the state that are governed by the DFS. Among other rules, it requires companies to demonstrate the ability to recover from a cyber event and restore normal operations and services.

Eslami at A.M. Best said the regulation may help to improve the resiliency of insurers to a cyber attack. He noted that the National Association of Insurance Commissioners also requires companies to provide similar information.

It all depends on the elements of coverage, however. “Policy language is not generalized and cannot be applied the same way to all of the companies,” Eslami said.

He said insurance companies that issue cyber policies may want to consider limiting their exposure per industry sector to a certain dollar amount to give them a better handle on potential losses — and their ability to cover those losses.

We are dealing with new exposures and new risks that we don’t have the background for, and I think there are going to be some surprises. … I think Dyn caught a lot of people’s attention.– Nick Economidis, underwriter at Beazley

A.M. Best, he said, has suggested insurers model potential incurred-but-not-reported losses, and put aside a contingency reserve in response.

Right now, a huge natural catastrophe still has a greater potential to impact company solvency, he said. That could change as the frequency and manner of attacks increase, combined with the growth of cyber coverage and the Internet of Things.

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“There is a 100 percent chance we will see something worse than Dyn,” Stransky said. “There’s no way to avoid it.

“In some ways, it’s good it happened,” he said.

“It was a great wake-up call. It got people thinking. It’s a good thing if they are nervous about this. It’s better to be nervous now than scrambling around when a big attack happens as they try to figure out what is going on.

“If they are more prepared, they will be more resilient when something happens.” &

________________________________________________________________

2017 Most Dangerous Emerging Risks

Artificial Intelligence Ties Liability in Knots

The same technologies that drive business forward are upending the nature of loss exposures and presenting new coverage challenges.

 

U.S. Economic Nationalism

Nationalistic policies aim to boost American wealth and prosperity, but they may do long-term economic damage.

 

 

Foreign Economic Nationalism

Economic nationalism is upsetting the risk management landscape by presenting challenges in once stable environments.

 

 

Coastal Mortgage Value Collapse

As climate change drives rising seas, so arises the risk that buyers will become leery of taking on mortgages along our coasts.  Trillions in mortgage values are at stake unless the public and the private sector move quickly.

Anne Freedman is managing editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]