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Risk Report: Technology

Insuring Innovation

For a company that’s changing the way people drive, building the right insurance program was a collaborative accomplishment.
By: | April 9, 2018 • 6 min read

In 1999, Netflix launched not just a new way to rent movies but a new way to buy — pay one price and swap out titles as often as you please. In the two decades since, companies have applied the same model to high-end handbags and designer clothes, among other things.

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Clutch is one of a handful of companies that has taken that concept and kicked it up a notch.

This Atlanta-based startup partners with automakers and dealers to offer vehicles by subscription as an alternative to buying or leasing. The prospect is appealing: pay one monthly fee, flip vehicles as often as you like to suit your needs. Everything is included except gas.

But the model created a gray area as far as insurance was concerned. It’s a commercial venture, yes, but the vehicles aren’t driven for commercial use, nor are they being driven by employees. It required a commercial policy that responded like a personal policy — certainly not an off-the-rack program.

“Subscription is blurring this line between personal and commercial silos. What are we? Where do we fit?” said John Phelps, the company’s vice president of strategy and business development.

As other innovators have discovered, issues inevitably arise when you try to fit the company to the policy rather than the other way around.

“Where traditional carriers try to apply traditional products, it just doesn’t quite work,” said Iain Boyer, partner and head of product/underwriting management for Y-Risk, an underwriting management company.

“When you put a square peg in a round hole, sure, you can probably fit it in. But both the peg and the hole might be damaged a little bit. [With insurance] there’s a risk that if it doesn’t quite fit, there may be problems down the road.”

Building a Lasting Policy

Clutch experienced that early on with a traditional commercial fleet policy. Phelps characterized the policy as “very vanilla.”

“They looked at us like, ‘Well, if you were a plumbing company with X number of cars and eligible drivers, we would generally do pricing that looks like this.’ ”

It didn’t give them what they needed. It couldn’t accommodate the kind of features that Clutch wanted for its customers. It was also prohibitively expensive.

To get the coverage right, Clutch needed a broker committed to understanding their unique model. Phelps was introduced to Jillian Slyfield, managing director and U.S. sharing economy practice leader, Aon. Slyfield is a 2018 Power Broker®.

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Together, Clutch and Aon had to tackle a problem many new products or business models face: a dearth of data.

“It’s the early days of a new industry and so we didn’t have … 10 years of experience from 100,000 drivers. But the data we had started to grow and become more statistically relevant.”

With Slyfield on board, the team leveraged data to look like an approximated personal risk — something underwriters could wrap their heads around. Slyfield reached out to Y-Risk, which specializes in the sharing and on-demand economy. Y-Risk’s strong relationship with Hamilton Specialty gave the project the momentum it needed.

“Y-Risk was ultimately the one to say, ‘I get it, I like it, let’s do it this way,’ and Hamilton was the one who said, ‘I trust Y-Risk to do this.’ All of the entities came together to create something that has never existed,” Phelps said.

“I enjoy working with people like Jillian and John and their teams, because collectively, we’re trying to solve a problem and we’re trying to do it in a cost-effective manner,” said Y-Risk’s Boyer. “So it becomes a really collaborative thing.”

Thinking everything through in advance is critical. The teams carefully considered every possible scenario, mapping out every possible circumstance that could impact the platform, the vehicles or the subscribers.

That’s how you avoid surprises, said Slyfield: “I liken it to painting a room. If you just started with a paintbrush and a can of paint it would look like a disaster when you got done. You start with tape. And it takes twice as much time to tape off the room and make sure … everything’s ready. But then painting is really easy, and it looks nice when it’s done.”

John Phelps, vice president, strategy and business development, Clutch

Problems arise when covering something new, “and [the insurer] discovers six months down the line that they priced it wrong, the losses are worse than they thought, the losses are coming from places they didn’t anticipate, or the price was inadequate because they applied it to the wrong exposure base,” said Boyer.

“Things don’t work as they were intended. That’s bad for everybody.”

Another pain point: Unforeseen coverage problems could affect the claims experience, added Boyer. People engaging with a platform like Clutch are typically active social media users.

“They’re not just going to brood about it. They’re going to let people know that they weren’t happy. So it’s more important than ever that we’re certain the insurance will do what it’s intended to do.”

Supporting the Future

Said Phelps, “We can’t just show up to the table and say ‘Hey, we’re new and we’re technology driven, therefore you should understand us.’ We feel a burden and a responsibility on our side to be a good partner [and that means] us working really hard to help them understand exactly what the risk is.”

Jillian Slyfield, managing director and U.S. sharing economy practice leader, Aon

Boyer said he relishes the opportunity to face fresh underwriting challenges.

“As an underwriting management company, we get back to, ‘How do you underwrite this new and emerging space? How do you think about insurance that helps your clients grow and be successful?’

“That’s what makes it interesting and exciting. [It’s] an opportunity to do what you joined the industry to do, which is underwrite risks, and think about and [identify] the right coverage — not just apply traditional products and underwrite the product. You’re underwriting the company.”

“We can’t just show up to the table and say ‘Hey, we’re new and we’re technology driven, therefore you should understand us.’ ” —John Phelps, vice president, strategy and business development, Clutch

Slyfield and Boyer know that they’re in the unique position to enable and empower new companies and support their mission of changing the way business is done.

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“What I’m doing,” said Boyer, “is trying to develop the products, the structure, the methodologies and the mechanics of the insurance that enables them to grow and be successful.”

Moving forward, it will be progressive brokers, underwriters and carriers who have the clear path to run. Encouragingly, both Boyer and Phelps said insurers are very receptive to understanding new risk.

Despite the industry’s reputation as a plodding, cautious innovator, Phelps said some carriers “are moving more quickly and are more willing to entertain this conversation.”

Those carriers, he said, “have their lines in the water, so to speak. And that’s a great thing. Those are the people we end up setting our meeting with faster.” &

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

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]