Property Risk

Cyberattacks Reach the Physical Realm

Underwriters and risk managers are beginning to get their arms around the next wave of cyber exposure — an attack that causes property or bodily damage.
By: | July 27, 2017 • 7 min read

When the Baku-Tbilisi-Ceyhan pipeline exploded in 2008 in eastern Turkey, it damaged the pipeline in Refahiye, spewed oil into the environment and posed physical harm to firefighters called in to quell the flames.

Cyber attackers apparently hacked into the pipeline’s control system and manipulated valves to increase pressure inside the pipe, while suppressing alarms that would have alerted operators to an error.

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In 2014, an unnamed steel mill in Germany sustained extensive damage after hackers breached the plant’s computer network via a spear phishing email, then infiltrated industrial systems that control operational machinery.  The attack compromised the system so that a blast furnace could not be shut down.

In another well-known incident the year before, the Stuxnet computer virus engineered by U.S. and Israeli forces damaged thousands of centrifuges at an Iranian nuclear power plant, again compromising system controls while making it appear everything was working normally. The virus was introduced through an employee’s thumb drive.

These are only a few examples of cyberattacks that caused physical property damage and potential bodily injury.

“The breaches and cyberattacks we see in the news are usually around the theft of personally identifiable information,” said Tracie Grella, global head of cyber risk insurance at AIG.

“We’ve seen ransomware events, DOS attacks. The data disclosure and business downtime are usually the results of a network breach. But the potential for extensive physical damage is an emerging risk.”

As cyber risk rapidly evolves, the insurance industry is working hard to keep up. However, gray areas remain and there are unanswered questions about how to underwrite and mitigate such a dynamic risk.

Loss Scenarios

“Five to 10 years ago, cyberattacks were motivated primarily by financial gain and access to confidential data,” said Chris O’Byrne, cyber underwriting specialist at FM Global. “This has evolved into more attacks focused on causing business disruption, and others where the goal is physical damage.”

Tracie Grella, global head of cyber risk insurance, AIG

Though every type and size of company is susceptible to a cyberattack, those with industrial-control systems (ICS), such as manufacturers and energy suppliers, may be most vulnerable to an attack intended to cause physical damage. Industrial-control systems are comprised of many components relying on communication between separate computer networks. The less cohesive a system is, the more opportunities arise for hackers to find a way in.

“We’re seeing more reports of malware being written specifically to target these systems,” O’Byrne said.

“Companies first think to look at their GL or property policies for coverage … but these policies really were not designed to respond to cyberattacks.” — Tracie Grella, global head of cyber risk insurance, AIG

“The intent may not be to expressly cause physical damage, but that could certainly be a result.”

The physical damage that could result from an attack on ICS varies. It could be a fire that destroys equipment or a whole facility; it could be the simple wearing down and corrosion of machinery; it could involve environmental damage, or damage to any goods being produced.

“Hackers can spoof sensors by sending false data. They can force cyclical behaviors, like turning something on and off in rapid cycles, which causes machinery to wear out, fuses to be blown, leaking, and in some cases explosion and fire,” said Tom Harvey, product manager of cyber solutions at RMS, the risk modeling firm.

“It could be something as simple as disconnecting safety features,” he said. “Everything would be operating as it should, but there’s the increased risk for bodily injury.”

Spoofing sensors also can cause damaged goods, without harming any machinery or equipment. In a refrigerated truck, for example, hackers would feed sensors false data so they continually record a temperature of 0 degrees, even if it’s 70 inside the truck. An entire shipment of frozen goods would be ruined by the time it reaches its destination.

“It’s not that the refrigeration equipment was broken; it’s that the sensors were fed the wrong information, and no one had any indication that it was false,” said Robert Parisi, cyber product leader at Marsh. “These losses will not fall into the simple buckets in which the insurance community likes to put things.”

The scope of potential losses leaves risk managers wondering what insurance policy, if any, will cover the damage.

Looking for Cover

“The question in insurance becomes: where is that covered?” Grella said.

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The industry has no uniform way to address these losses. Cyber coverage typically excludes physical loss. Property or general liability policies likely cover property damage, even if the underlying trigger was a cyber event. Companies also might find coverage in crime or fidelity policies, if the breach was perpetrated by an employee.

“Companies first think to look at their GL or property policies for coverage, and they may find it there, but these policies really were not designed to respond to cyberattacks,” Grella said.

“Finding silent coverage is not really where insurers or insureds want to be. Clients want to know what they’re buying and what’s covered, and carriers want to know exactly what they’re covering.”

Coverage for cyber-triggered physical losses could extend in two directions. Carriers could begin offering affirmative coverage for cyber events in property policies, or cyber policies could expand to include property damage and bodily injury, not just loss of data, business interruption and other non-physical losses.

Tom Harvey, product manager of cyber solutions, RMS

“Market conditions will dictate that evolution to some degree,” Harvey of RMS said. “At the moment, the property market is very soft, which drives underwriters to try to win more business, which means they’ll be more generous with their cyber coverages. On the other hand, regulators want to ensure underwriting is done properly, with adequate controls in place, which could push property underwriters to move away from cyber endorsements.”

Property and cyber underwriters need to work together to ensure they are managing the risk appropriately. Marsh’s Parisi said some cyber insurers have offered to cover physical loss only if the insured’s property policy does not respond. This shows the industry is recognizing the widening coverage gaps.

“Cyber policies expanding to take in this exposure is the cleanest way to do it,” he said. “We are seeing greater flexibility on the part of the cyber market to adapt to changing loss scenarios that don’t have actuarial data behind them or underwriting standards.”

AIG, Marsh and FM Global are among insurers and brokers offering expanded cyber products designed to affirmatively cover physical harm.

“We’re starting to get more inquiries about our coverage and how it intersects with other cyber policies,” FM Global’s O’Byrne said. “What clients really want is contract certainty.”

Risk Mitigation

RMS has spent the past year modeling the severity of physical losses triggered by a cyberattack, but nailing down the frequency remains a challenge.

“We have developed models to confidently help insurers assess what the severity of cyber-physical events might be,” Harvey said. “RMS are continuing to explore methods of assessing the probability of these rare events as we know both the frequency and severity are critical components of quantifying the risk.”

With cyber risks evolving and uncertainties in the type and scope of losses and coverage gaps, the best approach risk managers can take is to treat cyber like any other operational risk and apply enterprise risk management.

“The best companies approach cyber risk the same way they do currency risk, or political unrest, or weather risk — like any other standard risk,” Parisi said. “Tech-based risks are really no different that any other risk and you need to manage them through the normal risk management channels. Make sure that technology risk is part of the ERM discussion.”

“If you are targeted by a sophisticated group of hackers, they will find a way in. You have to make sure you’re properly covered.” —Tom Harvey, product manager, cyber solutions, RMS

Cross-functional teams including risk management, IT, operations and security should work with senior executives to assess the scope of cyber risk and develop a multi-pronged strategy, O’Byrne said.

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“Buying the newest, shiniest piece of technology won’t necessarily solve your exposure. Assuming that the IT guys will somehow fix it ignores the fact that technology has crept into everything that we do. It’s an active risk to be managed, not a problem to be solved,” he said.

Patching cyber vulnerabilities in industrial-control systems, and separating critical control systems from business networks and other non-critical functions can make it harder for hackers to access machinery and production controls.

Risk managers also should conduct gap analyses to determine if and where they have coverage for physical damage from a cyberattack.

“Your broker or a third-party vendor can provide this service,” Grella of AIG said. “You want to make sure you have a primary policy that provides coverage for physical damage from cyber on an affirmative basis.”

Given the near impossibility of gauging and defending against all cyber exposures as the risk takes on new forms, closing coverage gaps will be the most critical risk management technique.

“If you are targeted by a sophisticated group of hackers, they will find a way in,” Harvey said. “You have to make sure you’re properly covered.” &

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

More from Risk & Insurance

More from Risk & Insurance

Black Swan: Cloud Attack

Breaking Clouds

A combination of physical and cyber attacks on multiple data centers for cloud service providers causes economic havoc. Even the most well-prepared companies are thrown into paralyzing coverage confusion.
By: | July 27, 2017 • 10 min read

Scenario

By month 16 of the new presidential administration, the Sunshine Brigade is more than ready to act.

Stoked by their anger over rampant economic inequality, the mostly college-educated group of what might best be called upper-middle-class anarchists — many of them from California, Oregon and Washington State — put in motion the gears of a plan more than two years in the making.

Their logic, to them at least, is unimpeachable. Continued consolidation of economic power into the hands of fewer and fewer corporations is creating a world where the rich increasingly exploit and shut out the poor.

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The rise of the techno giants is accelerating this trend, according to the Sunshine Brigade’s de facto leader Emily Brookes, an All-American rugby player and a graduate of Reed College in Oregon.

With a new presidential administration seemingly bent on increasing the economic advantages of the rich with no end in sight, nothing to do then but break things up; and in so doing break the hold of this technology oligarchy.

As Emily Brookes so forcefully put in her instant messages to the other members of the brigade: Break the Cloud.

With more than 500 members, many of them with ample financial and technical resources, the Sunshine Brigade is very capable of delivering on its plan for a two-pronged attack.

It is also radicalized enough to justify the loss of some human life, even its own countrymen, to “save” — in its collective logic — the tens of millions of global citizens that are living as virtual slaves in this callous, exploitative global economy.

With websites and digitally connected services large and small down for days, irritation turns to fear.

The first wave in the attack is an attempt to infect and shut down the data centers for the top three cloud service providers. It takes months to set up this offensive.

Rather than rely on a phishing scam from outside the firewalls of the service providers, The Sunshine Brigade uses its social and business connections to place three members on each of the cloud provider’s payrolls. An infected link from someone you know, someone in the cubicle right next to you, seems like an unstoppable play.

It only partially works. Only one of the cloud service providers is harmed when an unsuspecting employee clicks on a link from their traitorous co-worker. The released malware manages to cripple a major cloud service provider for 12 hours.

With millions of users affected, the act creates substantial disruption and garners global headlines. Insured losses are around $1.5 billion. But this is just the beginning.

The morning after, the Sunshine Brigade unleashes a far more devastating and far more ruthless Round Two.

Using self-driving trucks, the Sunshine Brigade smashes into five data centers; three on the West Coast, and two in the Midwest. Fourteen employees of those cloud servers are killed and another 23 injured; some of them critically.

This time the Brigade gets what it wanted. The physical damage to the data centers is substantial enough that it significantly affects three of the top four cloud service providers for five days.

With websites and digitally connected services large and small down for days, irritation turns to fear.

Small and mid-sized banks, which host their applications on clouds, are shut down. Small business owners and consumer banking customers immediately feel the brunt. Retailers that depend on clouds to host their inventory and transaction information are also hit hard.

But really, the blow falls everywhere.

In the U.S., transportation, financial, health, government and other crucial services grind to a halt in many cases.

Not everyone is disrupted. Some of the larger corporations are sophisticated enough in their risk management, those that used back-up clouds and had steadfast business resiliency plans suffer minimal disruption.

Many small to mid-size companies, though, cannot operate. Their employees can’t get to work and when they can, they sit idly in front of blank computer screens connected to useless servers.

For the man on the street, this is hell.

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Long lines blossom at the likes of gas stations, banks and grocery stores. A population already on edge from a steady diet of social media provocation becomes even more inflamed.

By nightfall of Day Five, the three major cloud service providers are recovered, and digital “normalcy” begins to creep back. But for many small and medium-sized businesses, the recovery comes way too late.

Economic losses promise to register in the tens of billions. It’s not being too imaginative to think that losses could hit the $100 billion mark.

Two multinational insurers based in the U.S., three Lloyd’s syndicates and a Bermuda insurer signal to regulators that their aggregate cyber-related losses are so great that they will most likely become insolvent.

Emily Brookes and her cohorts were willing to kill more than a dozen people to promote their worldview. In their youthful naiveté, they could not know just how much suffering they would cause.

Observations

For some commercial insurance carriers, the aggregated losses from a prolonged disruption of cloud computing services could be catastrophic, or close to it.

“It’s on a par with any earthquake or hurricane or tornado,” said Scott Stransky, an associate vice president and principal scientist with the modeling firm AIR Worldwide.

AIR modeled the insured losses for the Fortune 1,000 were Amazon’s cloud service to go down for one day. They came up with a figure of $3 billion.

Now consider that most businesses in this country are small businesses, with not nearly the risk management sophistication of the Fortune 1000. Then consider a cloud interruption of five days or more.

Mark Greisiger, president, NetDiligence

“Almost any company you talk about today would rely to some extent on the cloud, either to host their website, to do invoicing, inventory, you name it — the cloud is being used across the board,” Stransky said.

“It’s a significant issue for insurers and one we think about a lot,” said Nick Economidis, an underwriter with specialty carrier Beazley.

“Should a cloud service provider go down, everybody who is working with that cloud service provider is impacted by that,” he said.

“Now, pretty much every software maker is on the cloud,” said Mark Greisiger, president of NetDiligence.

“In the old days, someone would come in and install software on your servers and come in annually for maintenance. That’s all gone bye-bye. Everybody who makes software is forcing you onto their private cloud,” Greisiger said.

The aggregation risk for carriers is complicated by the degree of transparency they have into which insured’s applications are hosted on which cloud provider.

Now here’s the even trickier part. Clouds outsource to other clouds.

“It’s almost becoming a spider’s web of interdependencies on who has access to what in terms of upstream and downstream providers,” Greisiger said.

Determining which of their insureds is hosted on which cloud, and in turn, where that cloud is outsourcing to other clouds can be very difficult for carriers to determine.

Even if a company is careful to diversify the risks they’re taking, they might not realize that a high percentage of insureds are even with the same cloud provider. They could be hit with devastating losses across their entire portfolio of business, said an executive with BDO consulting.

AIR’s Stransky said his company launched a product in April, ARC, which stands for Analytics of Risk from Cyber, which is designed to help carriers gain that much needed transparency.

Among insureds, surviving an event of this magnitude will depend not only on the sophistication of their risk management department, but on the company’s overall ability to negotiate contracts with vendors and suppliers that will indemnify the company in the case of a cloud outage of this duration.

It will also depend on organization’s understanding that there is no off-the-shelf solution that will prevent an event like this or make a company whole after it.

Shiraz Saeed, national practice leader, cyber, Starr Companies

Experts say contracts with cloud service providers, customers and suppliers must be structured so that a company is defended should it lose cloud access for as much as five days or more.

Best practices also include modeling just what your losses would look like in this area, and vetting your full portfolio of insurance policies to understand how each would respond.

One broker said buyers can’t be blamed if the complexities of the coverage issues at stake here are initially hard to grasp.

“It’s becoming a spider’s web of interdependencies on who has access to what.” —Mark Greisiger, president, NetDiligence

“I think it’s the broker’s job to inform the client of this exposure,” said Doug Friel, a vice president with JKJ Commercial Insurance, based in Newtown, Pa.

“You may have business interruption coverage for direct physical damage to your building. But have you ever thought about your business income if your IT structure goes down?” Friel said.

He said many buyers might not realize there is a difference.

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Large businesses should have the resources to demand from their cloud service providers that they be indemnified for the entirety of a cloud failure event. There will be a fee for that, but it will be well worth paying, Friel said.

“You have to push,” Friel said. “They are going to say, ‘Here is our standard contract, sign it.’ ”

Don’t settle for that, he said, although many do in ignorance, he added.

“Where possible, we would look for clients to negotiate their contracts. These business relationships should be mutually beneficial, even if one of these events occur,” said Shiraz Saeed, national practice leader, cyber, for the Starr Companies.

It’s a partnership, he said.

“It shouldn’t be a zero sum game on either side. I think there should be an understanding of what the potential loss might be and then designing a contract around that,” he said.

While cloud service providers are known for having high grade security systems, most average organizations don’t have the means for that. But no matter what a company’s resources, the first step is modeling where your digital assets are, and what you and your customers stand to lose if you lose access to them.

“Most insureds don’t seem to understand the amount of individual loss that you could be subject to,” said Jim Evans, leader of insurance advisory services at BDO Consulting. “Usually this stuff is measured in hours,” he said. “But what if a cloud provider is out for three or four days?” he said.

“Trying to quantify what you did lose in an event is hard enough. Trying to do a modeling exercise about what you could lose? It’s something that just doesn’t get done enough,” he said.

Once you have an understanding of what you own and what you stand to lose, the next step is prioritizing the protection of the assets you have. That means drilling into your contract with your cloud service providers to get the maximum indemnification.

It also means spreading your risk so that if at all possible, not all of your assets or your customers’ assets are housed by one cloud service provider. Cloud platforms can be public, private, or a hybrid of the two.

Understanding where your assets are in that architecture is crucial. Spending the money to insure that they are protected behind a diverse menu of firewalls is highly advisable.

Navigating the different iterations of business interruption coverage in property, cyber and kidnap and ransom policies is also important.

Make sure your broker can provide clarity on the different types of coverages and tailor them to your needs, experts said.

The concept of design thinking is really what’s in play here. Organizations have to work with vendors in every aspect of their operations to design a risk management system that can sustain this kind of hit.

“Build a better mousetrap to protect yourself,” said JKJ’s Friel.

“Depending on your service, you need to have the best and the brightest designing this stuff. Spread the risk.”

“Don’t be afraid to ask for more,” he said.

Postscript

In engineering an attack on the cloud, Emily Brookes and her cohorts accomplished the opposite of what they set out to do.

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Only the largest corporations with the most sophisticated risk management programs were able to survive the attempt to break the cloud with manageable losses.

Small businesses, the true backbone of the U.S. economy, suffered terribly. Entrepreneurs who put their life’s work into their business lost it in many cases.

Those on the lowest part of the economic scale, the working poor, lost their jobs and their ability to cover their rent and grocery bills. They joined the ranks of those subsidized by the government by the millions.  The attempt to break the cloud resulted in an even more polarized society. &

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