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An Inevitable Threat

Cyber: The New CAT

Cyber risk is a foundation-level exposure that should be viewed similar to a company’s property, liability or workers’ comp risks.
By: and | April 7, 2014 • 6 min read

Superstorm Sandy. The Joplin tornado. The Japanese earthquake and tsunami. California wildfires. 9/11. Catastrophes come in many forms. It is universally understood that despite our best efforts, disaster can strike due to forces beyond our control. Cyber threats are equally dangerous and diverse — and just as unstoppable.

Yet even as catastrophe risk management matures and scores of executives join the catastrophe conversation, the dragon known as cyber risk still sits in the middle of the board room, quietly smoldering.

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In every industry and at every company size, cyber risk is a foundation-level exposure that every business must confront — one that must be viewed with the same gravity as a company’s property, liability or workers’ comp risks.

As recent as a decade ago, that might have been an overstatement. But not now. Technology and business are fundamentally linked. Computers and the Internet are the primary platform for communicating with customers and vendors, managing profits and expenses, paying employees, operating the machines that produce goods and provide services, and making sure that the end product gets into customers’ hands on schedule. Mobile technology and the Internet of Things are opening new channels, making technology a physical extension of ourselves, both personally and commercially.

“The entire economy is so reliant, in ways that we don’t even see, on technology and the storage, transmission and usage of data, both personal and for analytical purposes, that it’s fundamental to almost every sector,” said Oliver Brew, vice president for professional, privacy, and technology liability at LIU Liberty International Underwriters, the specialty line division of Liberty Mutual in New York.

Video: Computer security expert Mikko Hyppönen explains how he tracked down the creators of the first PC virus, which hit the net 25 years ago, and how to stop the new viruses of today.

That reliance is only going to grow. A January report by Forrester Research described software assets as more critical to business success than financial assets over the next 20 years.

“If you take a look at the public companies’ 10-Ks and publicly disclosed statements, what are they emphasizing that’s going to differentiate them from their competitors, increase sales, decrease costs and maximize efficiency? They focus on the use of technology and the use of information assets,” said Kevin Kalinich, global practice leader for cyber and network risk at Aon Risk Solutions.

With increased technology comes increased opportunity for attack. However, that reality didn’t get a lot of traction in the C-suite until the recent Target breach splashed it across world headlines. Even now, there are still some resting easy, confident that their IT teams have everything under control. Others assume cyber attacks are a threat largely confined to industries such as retail, health care and financial services — sectors with the most data to lose.

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Small businesses, in particular, downplay the risk, said Jesse Bessler, an account executive at Lacher & Associates, of Souderton, Pa. “I think it’s that they just don’t understand the risk, and they think that [a cyber policy] is an add-on item they don’t need.”

Increased Sophistication

Security experts, however, are trying to break through the wall of denial. Cyber attacks, they argue, are akin to massive storms or similar to the focused destruction of a tornado — something you can prepare for, but not something you can prevent. Despite firewalls and antivirus programs, experts say, cyber punches will eventually land inside every company.

To grasp the magnitude of the threat, it’s important to recognize that the driving forces behind cyber crime are vast, varied and as uncontrollable as any atmospheric or geologic force. The threat is now ubiquitous, and experts agree that while making an effort to reduce the risk of a breach is important, it is no longer possible to completely prevent cyber attacks.

Kurtis Suhs Ironshore

Kurtis Suhs
Vice President
Ironshore

“It’s like two identical cars in a mall parking lot,” explained Kurtis Suhs, vice president and national technology and privacy product manager for Ironshore. “If one’s locked and one’s unlocked, the bad guy’s going to go to the unlocked car. But if the bad guy really wants to get into the locked car, he will — it’ll just take longer.”

And yet, organizations keep brushing off the threat. That may be because “cyber risk” has become synonymous with data theft. If an entity does not have a significant aggregation of customer financial data, executives assume they won’t be targeted. The reality is that the true exposure is no longer just about credit card or Social Security data. Hackers have expanded their target list, adopted a more patient approach and found deep-pocketed sponsors, whether private-sector or state-sponsored, security experts said.

Sophisticated hackers are conducting long-term surveillance and probing for weaknesses they can exploit for financial gain, said David Remnitz, global and Americas leader of Ernst & Young’s forensic technology and discovery services business. “The end result here is the theft of highly valuable, internal information for significant financial gain,” he said.

While that could mean outright theft of trade secrets or confidential M&A data, it could also mean corporate sabotage, as in corrupting a decade of research and development results or putting competitors out of business. Imagine a market where most of the players used one primary vendor as a source for a key ingredient. An organization could contract with a lesser-used source for that ingredient, then disrupt the operations of the primary vendor via a denial-of-service attack or other type of malware, leaving the rest of the market scrambling for suppliers.

The potential for lost business and liability claims could be devastating for the affected companies. Even those with solid business continuity plans in place could still take heavy hits from the reputational fallout.

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“A large company might be able to absorb that risk. A small company can’t,” said Elissa Doroff, a vice president and senior advisory specialist in Marsh’s network security and privacy practice in New York.

To date, breaches have largely been limited to individual companies, but the potential for larger events looms. One concern centers on cloud companies, which could host data for hundreds of businesses. A data breach or network interruption, or the physical destruction of a cloud-service data center could wreak larger havoc on the economy.

“That’s a potentially catastrophic loss,” said Doroff.

The sky’s the limit at this point. Criminals are capable of disrupting a multinational corporation, a transportation or logistics network, a health care system, an entire industry or even an entire region, creating havoc and leading to economic losses in the millions or billions — in many situations even putting lives at risk.

Keep in mind that those with ill intent don’t even need to have an IT background — the proliferation of hackers-for-hire means that anyone intent on doing damage can do so if their pockets are deep enough.

That said, it probably wouldn’t take a well-funded ring of genius-level hackers and a sophisticated attack plan to paralyze the average organization. Three years ago, the U.S. subsidiary of Shionogi, a Japanese pharmaceutical firm, suffered a devastating cyber attack that deleted the contents of 88 computer servers, crippling the company’s operations for several days, disabling its email, BlackBerry servers, order-tracking system, and financial management software. The attacker? A former mid-level employee, working from a public
Wi-Fi network at a nearby McDonalds, calmly sipping coffee while bringing Shionogi to its knees.

An Enterprise Approach

Even organizations that have never been affected by a catastrophe generally do not question the need for CAT planning. At the very least, most probably have a written evacuation plan in place and enough insurance to cover the potential physical damage of a storm. The smartest also address the whole picture from a supply chain and business continuity standpoint, and may have even considered questions about how to manage any reputational damage related to interruption of service to customers.

PwC’s report, Cyber Crisis Management: A Bold Approach to a Bold and Shadowy Nemesis, offers a new philosophy and approach to incidence response. This graphic shows the key elements of a structured cyber crisis response.

PwC’s report, Cyber Crisis Management: A Bold Approach to a Bold and Shadowy Nemesis, offers a new philosophy and approach to incidence response. This graphic shows the key elements of a structured cyber crisis response.

Cyber exposure should be approached in much the same way. It starts with engineering out the risk to whatever extent possible. If your roof is old, for instance, replacing it may be a way to ensure the building is more likely to stay intact if it’s battered by a storm. The cyber equivalent might be replacing old servers or upgrading any existing automated intrusion detection system. Security experts stress, however, that cyber risk is not an IT exposure, it’s an enterprisewide exposure. Therefore vulnerabilities need to be identified across an entire organization, with policies and procedures modified accordingly.

A comprehensive, enterprisewide disaster plan can also go a long way toward helping companies minimize the damage sustained in the event of a cyber attack. For every function of an organization, management needs to ask hard questions about how a cyber attack could disrupt that function, and what kind of back-up plan each department would need. Do you have a way to contact customers and suppliers if your email goes down? Do you have a crisis communication plan for alerting the public about how you’re handling the situation? Are your records backed up and accessible through a secure third-party?

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Increasingly, organizations will rely on insurance to ensure their survival after a cyber event. In a February survey by BAE Systems, nearly 30 percent of companies said they expected the cost of a cyber attack to exceed $75 million. Another 20 percent expected the cost to fall between $15 million and $75 million.

“There’s an expectation that this could have an extremely material effect on business performance, and that’s a risk they look to hedge,” said Paul Henninger, global product director for BAE Systems Applied Intelligence, a business unit of BAE Systems.

Taking a realistic approach to cyber attacks could improve underwriting of the risk, he said. Just as carriers evaluate whether clients are prepared for a CAT-5 hurricane, knowing some damage is likely, they could determine whether clients are ready for a cyber storm.

“You can’t make it go away, but you can minimize the impact on the bottom line and customers and reputation,” he said.

Complete coverage on the inevitable cyber threat:

Risk managers are waking up to the reality that the cyber risk landscape has changed. Every sector must prepare to withstand the storm.

042014_02c_hospital_thumbnailCritical Condition. The proliferation of medical devices creates a host of scary risks for the beleaguered health care industry.

042014_03c_cars_thumbnailDisabled Autos. It’s alarmingly easy for a hacker to take control of a driverless vehicle, tampering with braking systems or scrambling the GPS.

Alaska Plane CrashUnmanned Risk. The dark side of remote-controlled drones, which have already been hacked — by students.

dv738024An Electrifying Threat. There is a very real possibility hackers could devastate the nation’s power grids — for a potentially extended period of time.

Related articles:

Heading Off ‘Cybergeddon’. Experts say resistance is futile, but resilience is paramount.

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Workers' Comp

Do You Have Employees or Gig Workers?

The number of gig economy workers is growing in the U.S. But their classification as contractors leaves many without workers’ comp, unemployment protection or other benefits.
By: and | July 30, 2018 • 5 min read

A growing number of Americans earn their living in the gig economy without employer-provided benefits and protections such as workers’ compensation.

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With the proliferation of on-demand services powered by digital platforms, questions surrounding who does and does not actually work in the gig economy continue to vex stakeholders. Courts and legislators are being asked to decide what constitutes an employee and what constitutes an independent contractor, or gig worker.

The issues are how the worker is paid and who controls the work process, said Bobby Bollinger, a North Carolina attorney specializing in workers’ compensation law with a client roster in the trucking industry.

The common law test, he said, the same one the IRS uses, considers “whose tools and whose materials are used. Whether the employer is telling the worker how to do the job on a minute-to-minute basis. Whether the worker is paid by the hour or by the job. Whether he’s free to work for someone else.”

Legal challenges have occurred, starting with lawsuits against transportation network companies (TNCs) like Uber and Lyft. Several court cases in recent years have come down on the side of allowing such companies to continue classifying drivers as independent contractors.

Those decisions are significant for TNCs, because the gig model relies on the lower labor cost of independent contractors. Classification as an employee adds at least 30 percent to labor costs.

The issues lie with how a worker is paid and who controls the work process. — Bobby Bollinger, a North Carolina attorney

However, a March 2018 California Supreme Court ruling in a case involving delivery drivers for Dynamex went the other way. The Dynamex decision places heavy emphasis on whether the worker is performing a core function of the business.

Under the Dynamex court’s standard, an electrician called to fix a wiring problem at an Uber office would be considered a general contractor. But a driver providing rides to customers would be part of the company’s central mission and therefore an employee.

Despite the California ruling, a Philadelphia court a month later declined to follow suit, ruling that Uber’s limousine drivers are independent contractors, not employees. So a definitive answer remains elusive.

A Legislative Movement

Misclassification of workers as independent contractors introduces risks to both employers and workers, said Matt Zender, vice president, workers’ compensation product manager, AmTrust.

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered.”

Misclassifying workers opens a “Pandora’s box” for employers, said Richard R. Meneghello, partner, Fisher Phillips.

Issues include tax liabilities, claims for minimum wage and overtime violations, workers’ comp benefits, civil labor law rights and wrongful termination suits.

The motive for companies seeking the contractor definition is clear: They don’t have to pay for benefits, said Meneghello. “But from a legal perspective, it’s not so easy to turn the workforce into contractors.”

“My concern is for individuals who believe they’re covered under workers’ compensation, have an injury, try to file a claim and find they’re not covered in the eyes of the state.” — Matt Zender, vice president, workers’ compensation product manager, AmTrust

It’s about to get easier, however. In 2016, Handy — which is being sued in five states for misclassification of workers — drafted a N.Y. bill to establish a program where gig-economy companies would pay 2.5 percent of workers’ income into individual health savings accounts, yet would classify them as independent contractors.

Unions and worker advocacy groups argue the program would rob workers of rights and protections. So Handy moved on to eight other states where it would be more likely to win.

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So far, the Handy bills have passed one house of the legislature in Georgia and Colorado; passed both houses in Iowa and Tennessee; and been signed into law in Kentucky, Utah and Indiana. A similar bill was also introduced in Alabama.

The bills’ language says all workers who find jobs through a website or mobile app are independent contractors, as long as the company running the digital platform does not control schedules, prohibit them from working elsewhere and meets other criteria. Two bills exclude transportation network companies such as Uber.

These laws could have far-reaching consequences. Traditional service companies will struggle to compete with start-ups paying minimal labor costs.

Opponents warn that the Handy bills are so broad that a service company need only launch an app for customers to contract services, and they’d be free to re-classify their employees as independent contractors — leaving workers without social security, health insurance or the protections of unemployment insurance or workers’ comp.

That could destabilize social safety nets as well as shrink available workers’ comp premiums.

A New Classification

Independent contractors need to buy their own insurance, including workers’ compensation. But many don’t, said Hart Brown, executive vice president, COO, Firestorm. They may not realize that in the case of an accident, their personal car and health insurance won’t engage, Brown said.

Matt Zender, vice president, workers’ compensation product manager, AmTrust

Workers’ compensation for gig workers can be hard to find. Some state-sponsored funds provide self-employed contractors’ coverage.  Policies can be expensive though in some high-risk occupations, such as roofing, said Bollinger.

The gig system, where a worker does several different jobs for several different companies, breaks down without portable benefits, said Brown. Portable benefits would follow workers from one workplace engagement to another.

What a portable benefits program would look like is unclear, he said, but some combination of employers, independent contractors and intermediaries (such as a digital platform business or staffing agency) would contribute to the program based on a percentage of each transaction.

There is movement toward portable benefits legislation. The Aspen Institute proposed portable benefits where companies contribute to workers’ benefits based on how much an employee works for them. Uber and SEI together proposed a portable benefits bill to the Washington State Legislature.

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Senator Mark Warner (D. VA) introduced the Portable Benefits for Independent Workers Pilot Program Act for the study of portable benefits, and Congresswoman Suzan DelBene (D. WA) introduced a House companion bill.

Meneghello is skeptical of portable benefits as a long-term solution. “They’re a good first step,” he said, “but they paper over the problem. We need a new category of workers.”

A portable benefits model would open opportunities for the growing Insurtech market. Brad Smith, CEO, Intuit, estimates the gig economy to be about 34 percent of the workforce in 2018, growing to 43 percent by 2020.

The insurance industry reinvented itself from a risk transfer mechanism to a risk management mechanism, Brown said, and now it’s reinventing itself again as risk educator to a new hybrid market. &

Susannah Levine writes about health care, education and technology. She can be reached at [email protected] Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]