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

Black Swan: EMP

Chaos From Above

An electromagnetic pulse event triggered by the detonation of a low-yield nuclear device in Earth’s atmosphere triggers economic and societal chaos.
By: | July 27, 2017 • 9 min read

Scenario

The vessel that seeks to undo America arrives in the teeth of a storm.

The 4,000-ton Indonesian freighter Pandawas Viper sails towards California in December 2017. It is shepherded toward North America by a fierce Pacific winter storm, a so-called “Pineapple Express,” boasting 15-foot waves and winds topping 70 mph.

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Normally, Pandawas Viper carries cargo containers. This time she harbors a much more potent payload.

Unbeknownst to U.S. defense and intelligence officials, the Viper carries a single nuclear weapon, loaded onto a naval surface-to-air missile, or SAM, concealed below deck.

The warhead has an involved history. It was smuggled out of Kyrgyzstan in 1997, eventually finding its way into the hands of Islamic militants in Indonesia that are loosely affiliated with ISIS.

Even for these ambitious and murderous militants, outfitting a freighter with a nuclear device in secrecy and equipping it to sail to North America in the hopes of firing its deadly payload is quite an undertaking.

Close to $2 million in bribes and other considerations are paid out to ensure that the Pandawas Viper sets sail for America unmolested, her cargo a secret held by less than two dozen extremist Islamic soldiers.

The storm is a perfect cover.

Officials along the West Coast busy themselves tracking the storm, doing what they think is the right thing by warning residents about flooding and landslides, and securing ports against storm-related damage.

No one gives a second thought to the freighter flying Indonesian colors making its way toward the Port of Long Beach, as it apparently should be.

It’s only at two in the morning on Sunday, December 22, that an alert Port of San Diego administrator charged with monitoring ocean-going cargo traffic sees something that causes him to do a double take.

GPS tracking information indicates to him that the Pandawas Viper is not heading to Long Beach, as indicated on its digital shipping logs, but is veering toward Baja, Calif.

Were it to keep its present course, it would arrive at Tijuana, Mexico.

The port administrator dutifully notifies the U.S. Coast Guard.

“Indonesian freighter Pandawas Viper off course, possibly storm-related navigational difficulties,” he emails on a secure digital communication channel operated by the port and the Coast Guard.

“Monitor and alert as necessary,” his message, including the ship’s current coordinates, concludes.

In turn, a communications officer in the Coast Guard’s Alameda, Calif. offices dutifully alerts members of the Coast Guard’s Pacific basin security team. She’s done her job but she’s about an hour late.

At 3:15 am Pacific time on December 22, the deck on the Pandawas Viper opens and the naval surface-to-air missile, operated remotely by a militant operative in Jakarta, is let loose.

It’s headed not for Los Angeles or San Diego, but rather Earth’s atmosphere, where it detonates about 50 miles above the surface.

There it interacts with the planet’s atmosphere, ionosphere and magnetic field to produce an electromagnetic pulse, or EMP, which radiates down to Earth, creating additional electric or ground-induced currents.

The operative’s aim is perfect. With a charge of hundreds and in some cases thousands of volts, the GICs cause severe physical damage to all unprotected electronics and transformers. Microchips operate in the range of 1.5 to 5 volts and thus are obliterated by the billions.

As a result, the current created by the blast knocks out 70 percent of the nation’s grid. What began as an overhead flash of light plunges much of the nation into darkness.

The first indication for most people that there is a problem is that their trusty cellphones can do no more than perform calculations, tell them the time or play their favorite tunes.

As minutes turn to hours, however, people realize that they’ve got much bigger concerns on their hands. Critical infrastructure for transportation and communications ceases. Telecommunication breakdowns mean that fire and police services are unreachable.

For the alone, the elderly and the otherwise vulnerable, panic sets in quickly.

Hospital administrators feverishly calculate how long their emergency power supplies can last.

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Supermarkets and other retailers anticipating one of their biggest shopping days of the year on that Monday, December 23, instead wake up to cold homes and chilling prospects.

Grocery stores with their electricity cut off are unable to open and product losses begin to mount. Banks don’t open. Cash machines are inoperable.

In the colder parts of the United States, the race to stay warm is on.  Within a day’s time in some poorer neighborhoods, furniture is broken up and ignited for kindling.

As a result, fires break out, fires that in many cases will not draw a response from firefighting crews due to the communication breakdown.

As days of interruption turn into weeks and months, starvation, rioting and disease take many.

Say good-bye to most of the commercial property/casualty insurance companies that you know. The resulting chaos adds up to more than $1 trillion in economic losses. Property, liability, credit, marine, space and aviation insurers fail in droves.

Assume widespread catastrophic transformer damage, long-term blackouts, lengthy restoration times and chronic shortages. It will take four to 10 years for a full recovery.

The crew which launched the naval surface-to-air missile that resulted in all of this chaos makes a clean getaway. All seven that were aboard the Pandawas Viper make their way to Ensenada, Mexico, about 85 miles south of San Diego via high-speed hovercraft.

Those that bankrolled this deadly trip were Muslim extremists. But this boat crew knows no religion other than gold.

Well-paid by their suppliers, they enjoy several rounds of the finest tequila Ensenada can offer, and a few other diversions, before slipping away to Chile, never to be brought to justice.

Observations

This outcome does not spring from the realm of fiction.

In May, 1999, during the NATO bombing of the former Yugoslavia, high-ranking Russian officials meeting with a U.S. delegation to discuss the Balkans conflict raised the notion of an EMP attack that would paralyze the United States.

That’s according to a report of a commission to assess the threat to the United States from an EMP attack, which was submitted to the U.S. Congress in 2004. But Russia is not alone in this threat or in this capability.

Wes Dupont, vice president and general counsel, Allied World Assurance Company

North Korea also has the capability and the desire, according to experts, and there is speculation that recent rocket launches by that country are dress rehearsals to detonate a nuclear device in our atmosphere and carry out an EMP attack on the United States.

The first defense against such an attack is our missile defense. But some experts believe this country is ill-equipped to defend against this sort of scenario.

“In terms of risk mitigation, if an event like this happens, then that means the best risk mitigation we have has already failed, which would be our military defense systems, because the terrorists have already launched their weapon, and it’s already exploded,” said Wes Dupont, a vice president and general counsel with the Allied World Assurance Company.

The U.S power grid is relatively unprotected against EMP blasts, Dupont said.

And a nuclear blast is the worst that can occur. There isn’t much mitigation that’s been done because many methods are unproven, and it’s expensive, he added.

Lloyd’s and others have studied coronal mass ejections, solar superstorms that would produce a magnetic field that could enter our atmosphere and wipe out our grid.  Scientists believe that an EMP attack would carry a force far greater than any coronal mass ejection that has ever been measured.

An extended blackout, with some facilities taking years to return to full functionality, is a scenario that no society on earth is ready for.

“Traditional scenarios only assume blackouts for a few days and losses seem to be moderate …” wrote executives with Allianz in a 2011 paper outlining risk management options for power blackout risks.

“If an event like this happens, then that means the best risk mitigation we have has already failed … because the terrorists have already launched their weapon, and it’s already exploded.” — Wes Dupont, vice president and general counsel, Allied World Assurance Company

“But if we are considering longer-lasting blackouts, which are most likely from space weather or coordinated cyber or terrorist attacks, the impacts to our society and economy might be significant,” the Allianz executives wrote.

“Critical infrastructure such as communication and transport would be hampered,” the Allianz executives wrote.

“The heating and water supply would stop, and production processes and trading would cease. Emergency services like fire, police or ambulance could not be called due to the breakdown of the telecommunications systems. Hospitals would only be able to work as long as the emergency power supply is supplied with fuel. Financial trading, cash machines and supermarkets in turn would have to close down, which would ultimately cause a catastrophic scenario,” according to Allianz.

It would cost tens of billions to harden utility towers in this country so that they wouldn’t be rendered inoperable by ground-induced currents. That may seem like a lot of money, but it’s really not when we think about the trillion dollars or more in damages that could result from an EMP attack, not to mention the loss of life.

Allianz estimates that when a blackout is underway, financial trading institutions, for example, suffer losses of more than $6 million an hour; telecommunications companies lose about $30,000 per minute, according to the Allianz analysis.

Insurers, of course, would be buffeted should a rogue actor pull off this attack.

Lou Gritzo, vice president and manager of research, FM Global

“Depending on the industries and the locations that are affected, it could really change the marketplace, insurers and reinsurers as well,” said Lou Gritzo, a vice president and manager of research at FM Global.

Gritzo said key practices to defend against this type of event are analyzing supply chains to establish geographically diverse supplier options and having back-up systems for vital operations.

The EMP commission of 2004 argued that the U.S. needs to be vigilant and punish with extreme prejudice rogue entities that are endeavoring to obtain the kind of weapon that could be used in an attack like this.

It also argued that we need to protect our critical infrastructure, carry out research to better understand the effects of such an attack, and create a systematic recovery plan. Understanding the condition of critical infrastructure in the wake of an attack and being able to communicate it will be key, the commission argued.

The commission pointed to a blackout in the Midwest in 2003, in which key system operators did not have an alarm system and had little information on the changing condition of their assets as the blackout unfolded.

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The commission’s point is that we have the resources to defend against this scenario. But we must focus on the gravity of the threat and employ those resources.

Our interconnected society and the steady increase in technology investment only magnify this risk on a weekly basis.

“Our vulnerability is increasing daily as our use of and dependence on electronics continues to grow,” the EMP commission members wrote back in 2004.

But “correction is feasible and well within the nation’s means and resources to accomplish,” the commission study authors wrote. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]