Property Risk

Is Your Plant Ready for a Cyber Attack that Causes Physical Damage?

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

More from Risk & Insurance

More from Risk & Insurance

Insurtech

Kiss Your Annual Renewal Goodbye; On-Demand Insurance Challenges the Traditional Policy

Gig workers' unique insurance needs drive delivery of on-demand coverage.
By: | September 14, 2018 • 6 min read

The gig economy is growing. Nearly six million Americans, or 3.8 percent of the U.S. workforce, now have “contingent” work arrangements, with a further 10.6 million in categories such as independent contractors, on-call workers or temporary help agency staff and for-contract firms, often with well-known names such as Uber, Lyft and Airbnb.

Scott Walchek, founding chairman and CEO, Trōv

The number of Americans owning a drone is also increasing — one recent survey suggested as much as one in 12 of the population — sparking vigorous debate on how regulation should apply to where and when the devices operate.

Add to this other 21st century societal changes, such as consumers’ appetite for other electronic gadgets and the advent of autonomous vehicles. It’s clear that the cover offered by the annually renewable traditional insurance policy is often not fit for purpose. Helped by the sophistication of insurance technology, the response has been an expanding range of ‘on-demand’ covers.

The term ‘on-demand’ is open to various interpretations. For Scott Walchek, founding chairman and CEO of pioneering on-demand insurance platform Trōv, it’s about “giving people agency over the items they own and enabling them to turn on insurance cover whenever they want for whatever they want — often for just a single item.”

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“On-demand represents a whole new behavior and attitude towards insurance, which for years has very much been a case of ‘get it and forget it,’ ” said Walchek.

Trōv’s mobile app enables users to insure just a single item, such as a laptop, whenever they wish and to also select the period of cover required. When ready to buy insurance, they then snap a picture of the sales receipt or product code of the item they want covered.

Welcoming Trōv: A New On-Demand Arrival

While Walchek, who set up Trōv in 2012, stressed it’s a technology company and not an insurance company, it has attracted industry giants such as AXA and Munich Re as partners. Trōv began the U.S. roll-out of its on-demand personal property products this summer by launching in Arizona, having already established itself in Australia and the United Kingdom.

“Australia and the UK were great testing grounds, thanks to their single regulatory authorities,” said Walchek. “Trōv is already approved in 45 states, and we expect to complete the process in all by November.

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group.” – Scott Walchek, founding chairman and CEO, Trōv

“On-demand products have a particular appeal to millennials who love the idea of having control via their smart devices and have embraced the concept of an unbundling of experiences: 75 percent of our users are in the 18 to 35 age group,” he added.

“But a mass of tectonic societal shifts is also impacting older generations — on-demand cover fits the new ways in which they work, particularly the ‘untethered’ who aren’t always in the same workplace or using the same device. So we see on-demand going into societal lifestyle changes.”

Wooing Baby Boomers

In addition to its backing for Trōv, across the Atlantic, AXA has partnered with Insurtech start-up By Miles, launching a pay-as-you-go car insurance policy in the UK. The product is promoted as low-cost car insurance for drivers who travel no more than 140 miles per week, or 7,000 miles annually.

“Due to the growing need for these products, companies such as Marmalade — cover for learner drivers — and Cuvva — cover for part-time drivers — have also increased in popularity, and we expect to see more enter the market in the near future,” said AXA UK’s head of telematics, Katy Simpson.

Simpson confirmed that the new products’ initial appeal is to younger motorists, who are more regular users of new technology, while older drivers are warier about sharing too much personal information. However, she expects this to change as on-demand products become more prevalent.

“Looking at mileage-based insurance, such as By Miles specifically, it’s actually older generations who are most likely to save money, as the use of their vehicles tends to decline. Our job is therefore to not only create more customer-centric products but also highlight their benefits to everyone.”

Another Insurtech ready to partner with long-established names is New York-based Slice Labs, which in the UK is working with Legal & General to enter the homeshare insurance market, recently announcing that XL Catlin will use its insurance cloud services platform to create the world’s first on-demand cyber insurance solution.

“For our cyber product, we were looking for a partner on the fintech side, which dovetailed perfectly with what Slice was trying to do,” said John Coletti, head of XL Catlin’s cyber insurance team.

“The premise of selling cyber insurance to small businesses needs a platform such as that provided by Slice — we can get to customers in a discrete, seamless manner, and the partnership offers potential to open up other products.”

Slice Labs’ CEO Tim Attia added: “You can roll up on-demand cover in many different areas, ranging from contract workers to vacation rentals.

“The next leap forward will be provided by the new economy, which will create a range of new risks for on-demand insurance to respond to. McKinsey forecasts that by 2025, ecosystems will account for 30 percent of global premium revenue.

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“When you’re a start-up, you can innovate and question long-held assumptions, but you don’t have the scale that an insurer can provide,” said Attia. “Our platform works well in getting new products out to the market and is scalable.”

Slice Labs is now reviewing the emerging markets, which aren’t hampered by “old, outdated infrastructures,” and plans to test the water via a hackathon in southeast Asia.

Collaboration Vs Competition

Insurtech-insurer collaborations suggest that the industry noted the banking sector’s experience, which names the tech disruptors before deciding partnerships, made greater sense commercially.

“It’s an interesting correlation,” said Slice’s managing director for marketing, Emily Kosick.

“I believe the trend worth calling out is that the window for insurers to innovate is much shorter, thanks to the banking sector’s efforts to offer omni-channel banking, incorporating mobile devices and, more recently, intelligent assistants like Alexa for personal banking.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.”

As with fintechs in banking, Insurtechs initially focused on the retail segment, with 75 percent of business in personal lines and the remainder in the commercial segment.

“Banks have bought into the value of these technology partnerships but had the benefit of consumer expectations changing slowly with them. This compares to insurers who are in an ever-increasing on-demand world where the risk is high for laggards to be left behind.” — Emily Kosick, managing director, marketing, Slice

Those proportions may be set to change, with innovations such as digital commercial insurance brokerage Embroker’s recent launch of the first digital D&O liability insurance policy, designed for venture capital-backed tech start-ups and reinsured by Munich Re.

Embroker said coverage that formerly took weeks to obtain is now available instantly.

“We focus on three main issues in developing new digital business — what is the customer’s pain point, what is the expense ratio and does it lend itself to algorithmic underwriting?” said CEO Matt Miller. “Workers’ compensation is another obvious class of insurance that can benefit from this approach.”

Jason Griswold, co-founder and chief operating officer of Insurtech REIN, highlighted further opportunities: “I’d add a third category to personal and business lines and that’s business-to-business-to-consumer. It’s there we see the biggest opportunities for partnering with major ecosystems generating large numbers of insureds and also big volumes of data.”

For now, insurers are accommodating Insurtech disruption. Will that change?

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“Insurtechs have focused on products that regulators can understand easily and for which there is clear existing legislation, with consumer protection and insurer solvency the two issues of paramount importance,” noted Shawn Hanson, litigation partner at law firm Akin Gump.

“In time, we could see the disruptors partner with reinsurers rather than primary carriers. Another possibility is the likes of Amazon, Alphabet, Facebook and Apple, with their massive balance sheets, deciding to link up with a reinsurer,” he said.

“You can imagine one of them finding a good Insurtech and buying it, much as Amazon’s purchase of Whole Foods gave it entry into the retail sector.” &

Graham Buck is a UK-based writer and has contributed to Risk & Insurance® since 1998. He can be reached at riskletters.com.