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Cyber: A Tale of Two Markets

Inconsistencies in cyber insurance policies can lead to "Swiss cheese towers" of coverage.
By: | March 15, 2017 • 5 min read

You know a risk category is mature when people start to refer to it as “traditional.”

The cyber market is a perfect example. Despite the evolving nature of cyber risk, the industry has developed a set of traditional coverages that are well understood by underwriters and buyers alike.

Those policies include both first- and third-party coverage for well-known risks like privacy liability, breach response costs, cyber extortion and lost revenue from a hack; however, non-traditional risks such as physical damage and bodily injury resulting from a cyber breach or system failure pose new threats and challenges.

The cyber insurance market has been growing at roughly 25 to 30 percent per year and is estimated to reach almost $3 billion in 2017, according to Chris Keegan, National Cyber Practice Leader, Beecher Carlson.

As the cyber market continues to grow, buyers need to gain a better understanding of both their traditional and non-traditional exposures and the coverage they have in place to address them. Meanwhile, the insurance industry is working to develop coordinated solutions to more cohesively address the variety of traditional and emerging cyber risks.

Understanding Exposures beyond Liability

Chris Keegan, National Cyber Practice Leader

Though “cyber liability” is the common term for cyber policies, liability is just the tip of the iceberg of cyber exposure.

“We have a taxonomy problem,” Keegan said. “The term ‘cyber liability’ is misleading because cyber is so much bigger than liability. Cyber is property policies. Cyber is recall policies. Cyber is crime policies. The cyber world encompasses many different risk areas.”

The most prominent cyber risk on risk managers’ minds is usually privacy liability. A breach of employees’ and customers’ personal information – whether through theft or negligence – that results in direct costs of notification, hiring forensics investigators and lawyers, and public relations damage control.

Another high-impact but underestimated cyber exposure is business interruption.

If the server hosting your company website or intranet goes down, how will your business be affected and for how long? What if it’s your cloud provider or the platform where you store data? How many locations will it affect? Not only will a system failure interrupt regular business operations, it can also require rebuilding and replacing any lost data or in some cases hardware.

“You have to understand your exposure first before you even start to think about insurance,” Keegan said.

Models are useful tools that paint a detailed picture of the risk.

“Beecher Carlson’s In-Site suite of models applies to traditional risk exposures like privacy liability and to some non-traditional aspects like cyber property damage,” explains Keegan.

The privacy calculator is a maximum probable loss model based on cost information from the largest breaches, fees charged by breach response vendors, and Beecher Carlson’s independent market research. Those data points are combined to create a calculator that estimates the impact of a breach event.

The business interruption model takes into account all of the immediate extra expenses that come with a breach or failure; it also considers how the impact trickles throughout a company’s various locations. This depends on the type of cyber event. A downed network, for example, may have greater impact than a ransomware attack at a specific location.

“You can take all of that information, input the different variables, and see what your maximum loss might be in different scenarios,” Keegan said. “This differs from more traditional business interruption models that focus only on the impact to specific locations.”

Assessing exposure means looking at more than just data. Insurance buyers in every industry have to consider the physical damages that can result from a cyber incident as well.

If the code directing robots at a manufacturing plant fails, for example, it could not only damage an expensive piece of machinery, but also damage the goods it’s producing and present a safety risk to workers in the vicinity.

For an energy producer, a malfunction in software controlling the flow of oil through a pipeline can cause it to blow up and pollute the environment. In the auto industry, cyber risk increases as cars become more digitized, opening them to hack via on-board systems that cause malfunctions.

“If a hacker disables the brakes, for example, there will be property damage to the car and bodily injury to the driver, both caused by a cyber event. The end result is a liability back to the auto manufacturer,” Keegan said.

“Some of this can be covered under traditional general liability and property policies, but there is no guarantee. Not every property/casualty market will offer this coverage.”

This inconsistency leads to what Keegan calls “Swiss cheese towers” of coverage, where there may be coverage for cyber-related physical damage at the primary level, but further up the tower there are holes and gaps.

Mind the Tower Gaps

Cyber coverage can be found in a variety of different policies, resulting in both overlaps and gaps in coverage for some exposures.

Buyers are looking for a cohesive, streamlined solution to cover all of their cyber risks efficiently. And underwriters grapple with how to factor in “silent” cyber coverages, which respond to unexpected cyber events that fall outside the scope of risk for which the coverage was originally built.

Once the extent of a risk is understood, buyers should examine their cyber coverage across all of their policies and look for the gaps that need filling.

Increasingly, property/casualty insurers are able to tack cyber coverage onto property programs on a sub-limited basis, but the terms may vary from form to form. Ultimately, new solutions are needed to handle the full capacity of potential cyber-related losses.

“Excess DIC/DIL – or difference in conditions / difference in limits coverage – is one option that’s not yet offered widely by the markets but presents a promising solution,” Keegan said. Excess DIC/ DIL would sit on top of other designated policies and fill in the gaps between those policies.  Broader cyber coverage that includes traditional and non-traditional risks can be coordinated with property and casualty policies when the details of those policies are disclosed.

“This comes back to knowing your exposure. You need to know which policies this coverage should be in excess of in order to be sure it drops down and fills in gaps where it needs to,” Keegan continued.

Luckily, Keegan and other cyber leaders are working on developing more streamlined solutions.

“Technology is changing rapidly,” he said. “To be effective, the insurance that covers it has to adapt just as rapidly.”

To learn more about Beecher Carlson’s Cyber Risk, Cyber Liability practice, visit http://www.beechercarlson.com/services-delivered/cyber-liability.

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




Beecher Carlson is a large account risk management broker that delivers expertise by industry focus and product specialization. We strive to develop new and better technologies to support your business requirements and drive operational excellence.

Risk Management

The Profession

As a professor of business, Jack Hampton knows firsthand the positive impact education has on risk managers as they tackle growing risks.
By: | April 9, 2018 • 4 min read

R&I: Who is your mentor and why?

Ellen Thrower, president (retired), The College of Insurance, introduced me to the importance of insurance as a component of risk management. Further, she encouraged me to explore strategic and operational risk as foundation topics shaping the role of the modern risk manager.

Chris Mandel, former president of RIMS and Risk Manager of the Year, introduced me to the emerging area of enterprise risk management. He helped me recognize the need to align hazard, strategic, operational and financial risk into a single framework. He gave me the perspective of ERM in a high-tech environment, using USAA as a model program that later won an excellence award for innovation.

Bob Morrell, founder and former CEO of Riskonnect, showed me how technology could be applied to solving serious risk management and governance problems. He created a platform that made some of my ideas practical and extended them into a highly-successful enterprise that served risk and governance management needs of major corporations.

R&I: How did you come to work in this industry?

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From a background in corporate finance and commercial banking, I accepted the position of provost of The College of Insurance. Recognizing my limited prior knowledge in the field, I became a student of insurance and risk management leading to authorship of books on hazard and financial risk. This led to industry consulting, as well as to the development of graduate-level courses and concentrations in MBA programs.

R&I: What was your first job?

The provost position was the first job I had in the industry, after serving as dean of the Seton Hall University School of Business and founding The Princeton Consulting Group. Earlier positions were in business development with Marine Transport Lines, consulting in commercial banking and college professorships.

R&I: What have you accomplished that you are proudest of?

Creating a risk management concentration in the MBA program at Saint Peter’s, co-founding the Russian Risk Management Society (RUSRISK), and writing “Fundamentals of Enterprise Risk Management” and the “AMA Handbook of Financial Risk Management.”

A few years ago, I expanded into risk management in higher education. From 2017 into 2018, Rowman and Littlefield published my four books that address risks facing colleges and universities, professors, students and parents.

Jack Hampton, Professor of Business, St. Peter’s University

R&I: What is your favorite book or movie?

The Godfather. I see it as a story of managing risk, even as the behavior of its leading characters create risk for others.

R&I: What is your favorite drink?

Jameson’s Irish whiskey. Mixed with a little ice, it is a serious rival for Johnny Walker Gold scotch and Jack Daniel’s Tennessee whiskey.

R&I: What is the most unusual/interesting place you have ever visited?

Mount Etna, Taormina, and Agrigento, Sicily. I actually supervised an MBA program in Siracusa and learned about risk from a new perspective.

R&I: What is the riskiest activity you ever engaged in?

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Army Airborne training and jumping out of an airplane. Fortunately, I never had to do it in combat even though I served in Vietnam.

R&I: If the world has a modern hero, who is it and why?

George C. Marshall, one of the most decorated military leaders in American history, architect of the economic recovery program for Europe after World War II, and recipient of the 1953 Nobel Peace Prize. For Marshall, it was not just about winning the war. It was also about winning the peace.

R&I: What about this work do you find the most fulfilling or rewarding?

Sharing lessons with colleagues and students by writing, publishing and teaching. A professor with a knowledge of risk management does not only share lessons. The professor is also a student when MBA candidates talk about the risks they manage every day.

R&I: What is the risk management community doing right?

Sensitizing for-profit, nonprofit and governmental agencies to the exposures and complexities facing their organizations. Sometimes we focus too much on strategies that sound good but do not withstand closer examination. Risk managers help organizations make better decisions.

R&I: What could the risk management community be doing a better job of?

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Developing executive training programs to help risk managers assume C-suite positions in organizations. Insurance may be a good place to start but so is an MBA degree. The Risk and Insurance Management Society recognizes the importance of a wide range of risk knowledge. Colleges and universities need to catch up with RIMS.

R&I: What emerging commercial risk most concerns you?

Cyber risk and its impact on hazard, operational and financial strategies. A terrorist can take down a building. A cyber-criminal can take down much more.

R&I: What does your family think you do?

My family members think I’m a professor. They do not seem to be too interested in my views on risk management.




Katie Dwyer is an associate editor at Risk & Insurance®. She can be reached at [email protected]