Cyber Coverage

Navigating the Minefield

From gaps in coverage to confusing terminology and hidden exclusions, choosing the right stand-alone cyber policy is a complex and challenging process.
By: | February 20, 2017 • 7 min read

Over the past two decades, traditional lines, from GL to crime to property, have increasingly included some form of cyber cover as standard, while cyber underwriters have done their best to sculpt stand-alone policies that react to the evolving nature of both the risk and client demands. But for those seeking to buy their first stand-alone cyber policies, the landscape can be daunting.

Cyber specialist Lynda Bennett, chair of the insurance practice for law firm Lowenstein Sandler, described the increasingly crowded stand-alone cyber market as a “minefield” in which terminology, exclusions, terms and conditions can “vary wildly” from form to form.

Lynda Bennett, insurance practice chair, Lowenstein Sandler

“We are asked to review cyber policies because they can be unbelievably complex. While the appetite and demand is there for coverage, the nature of the risk is in flux and insurers are having as much trouble pinning down what risk they are willing to insure as risk managers are trying to work out what risks they need insurance for,” she said.

“Each year the traditional industry tweaks its exclusions to push buyers into a dedicated cyber policy. Then they are left in the Wild West having to negotiate a new policy,” said Bennett.

Marsh’s cyber product leader Bob Parisi believes that consistency of approach is appearing in tranches of the industry — such as underwriters who wish to write primary versus those who write excess, those who favor large companies over SMEs, and those who focus on privacy/liability versus those who underwrite direct first-party losses.

According to Jason Glasgow, vice president and practice lead for technology, privacy and network security professional liability with Allied World U.S., it is mainly terminology, not coverage, which sets most of today’s cyber policies apart. But there is no doubt first-time buyers can easily find themselves inadequately covered if they’re not careful.

Mind the Gap

Once predominantly serving to protect customer-facing sectors against data privacy breaches, the scope of cyber cover has expanded into many new areas including property damage, business interruption (BI) and bodily harm. Cobbling together adequate cyber coverage between traditional property, GL and crime policies is increasingly challenging.

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However, buying stand-alone cyber cover is not a magic bullet; sources all agree that gaps in coverage may still remain — particularly as far as property and BI are concerned.

Many underwriters are cautious, treating every applicant as “the virtual equivalent of a stilt house on the Gulf Coast.” — Bob Parisi, managing director, Marsh FINPRO

“BI cover in the cyber space is growing but is still limited,” said Parisi. “A risk manager who knows what their property policy would pay out on a loss due to fire would find the BI cover in a cyber policy looks like property language but doesn’t truly mirror the way a property policy deals with a loss.

“Cyber focuses mainly on the IT side, nonphysical perils, and is missing around two-thirds of what a traditional property policy would cover for physical peril,” he said.

“The challenge facing cyber underwriters is how to bridge the gap between where traditional P&C forms leave off and the current cyber wordings begin. Clients don’t care what ‘silo’ the insurance market decides to place the risk in, just that it is covered.”

Bob Parisi, managing director, Marsh FINPRO

A lack of loss history, fears over risk aggregation and uncertainty over how companies will react to cyber-triggered BI events mean many underwriters are cautious, treating every applicant as “the virtual equivalent of a stilt house on the Gulf Coast,” Parisi added.

Waiting periods are one area of concern in cyber BI policies. According to Kevin Harding, partner at RGL Forensics, typical cyber insurance policies include a waiting period of four to 12 hours before BI cover begins to apply. Depending on the nature of the cyber event or the business, this means anything from none to most of the sales loss could fall within the waiting period and therefore not be covered.

“To avoid this situation, and give more certainty to both the insurer and policyholder, we feel either a fixed monetary deductible or possibly a franchise deductible could be adopted,” he said.

“Once the losses are in excess of the defined monetary amount, both parties know what will be paid and no hourly calculation is required.”

However, Harding noted, insurers would need a lot more information about the value of the potential exposures at the time of underwriting the policy to determine the deductible values.

Terrorism is another “area of discomfort” for policyholders and insurers, with Bennett arguing that the definition of what constitutes a terrorism trigger is even vaguer under a cyber policy than other policy forms. “Several recent losses are speculated to be politically motivated, but many cyber policies exclude terrorism whether it is declared or undeclared as a terrorist act, leaving insureds on uncertain ground and heading towards coverage disputes with their insurers.”

Collaborative Approach

Buying stand-alone cyber property or BI cover needs to be carefully woven into a company’s overall program. Certain serious property damage coverages may be best off under a property policy that is likely to have greater limits and a different pricing scheme than a cyber policy, Glasgow said.

“Clients may not want their cyber policy to erode limits in their crime, E&O, D&O or property policies — they have those limits in place for a reason and need to maintain separate limits to ensure proper coverage,” he said.

Further, when two or more policies provide overlapping first-party property coverage it can create an uncertain outcome if a loss occurs, as each insurance policy will likely contain ‘other Insurance’ provisions that make each of them excess to the other.

“Each year the traditional industry tweaks its exclusions to push buyers into a dedicated cyber policy. Then they are left in the Wild West having to negotiate a new policy.” — Lynda Bennett, insurance practice chair, Lowenstein Sandler

“This has the potential to lead to uncertainty at the worst possible time — after the loss has happened,” said Grace Ries, head of cyber risk insurance products at FM Global, whose new product, “Cyber Optimal Recovery,” allows clients to position their property policies to maximize recovery alongside cyber or designate property as primary in order to preserve the cyber policy’s non-property limit.

Steve Anderson, cyber liability product executive at QBE, said some of the next steps in cyber product development are likely to include micro insurance, artificial intelligence and Internet of Things liability coverages, as well as cyber “all risk” policies — though only if the industry can come to grips with potential risk aggregation.

Beazley has taken a step in that direction, partnering with Munich Re to offer what it terms “holistic” cyber cover — catastrophic limits (up to $100 million at present) and broad coverage against virtually any type of cyber loss.

This type of cover can be bought either as primary to any other type of cover, or to dovetail around existing policies — the latter approach requiring a collaborative approach. According to Paul Bantick, Beazley’s leader for technology, media and business, the specialty insurer is seeing huge demand for the product and is already working with about 50 large corporate clients to design holistic programs.

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But, noted Jill Salmon, head of cyber/tech/MPL at Berkshire Hathaway Specialty Insurance: “If we are going to start writing holistic programs, broadening cover to include social engineering, crime coverages and property damage, or expanding cover to nonsecurity breach triggers such as system failure, this is not necessarily what cyber underwriters have grown up understanding, so broadening expertise in cyber is critical, as is working collaboratively with experts in other lines of insurance.”

For this reason, Salmon and others believe cyber still has a future within traditional lines such as property and crime, as well as other lines of coverage. “Cyber is a cross-line coverage. As other lines recognize cyber events as a cause of loss, they will have to integrate the cyber discipline,” she said.

With cyber products and inclusions only set to proliferate further, employing a specialist cyber broker is essential.

A good broker will not only help the client better understand what the most appropriate coverages are for their exposures, but can also negotiate better terms from carriers and in the case of bigger players may have already negotiated a degree of cross-carrier standardization of wordings through its work with other clients.

Holistic coverages may go some way toward simplifying the process for large firms, but for the majority, the future may hold an even wider choice of options as cyber grows both stand-alone and as a component of a wider array of covers.

Getting expert advice is an essential tool to help navigate the market. &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

2017 RIMS

Resilience in Face of Cyber

New cyber model platforms will help insurers better manage aggregation risk within their books of business.
By: | April 26, 2017 • 3 min read

As insurers become increasingly concerned about the aggregation of cyber risk exposures in their portfolios, new tools are being developed to help them better assess and manage those exposures.

One of those tools, a comprehensive cyber risk modeling application for the insurance and reinsurance markets, was announced on April 24 by AIR Worldwide.

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Last year at RIMS, AIR announced the release of the industry’s first open source deterministic cyber risk scenario, subsequently releasing a series of scenarios throughout the year, and offering the service to insurers on a consulting basis.

Its latest release, ARC– Analytics of Risk from Cyber — continues that work by offering the modeling platform for license to insurance clients for internal use rather than on a consulting basis. ARC is separate from AIR’s Touchstone platform, allowing for more flexibility in the rapidly changing cyber environment.

ARC allows insurers to get a better picture of their exposures across an entire book of business, with the help of a comprehensive industry exposure database that combines data from multiple public and commercial sources.

Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

The recent attacks on Dyn and Amazon Web Services (AWS) provide perfect examples of how the ARC platform can be used to enhance the industry’s resilience, said Scott Stransky, assistant vice president and principal scientist for AIR Worldwide.

Stransky noted that insurers don’t necessarily have visibility into which of their insureds use Dyn, Amazon Web Services, Rackspace, or other common internet services providers.

In the Dyn and AWS events, there was little insured loss because the downtime fell largely just under policy waiting periods.

But,” said Stransky, “it got our clients thinking, well it happened for a few hours – could it happen for longer? And what does that do to us if it does? … This is really where our model can be very helpful.”

The purpose of having this model is to make the world more resilient … that’s really the goal.” Scott Stransky, assistant vice president and principal scientist, AIR Worldwide

AIR has run the Dyn incident through its model, with the parameters of a single day of downtime impacting the Fortune 1000. Then it did the same with the AWS event.

When we run Fortune 1000 for Dyn for one day, we get a half a billion dollars of loss,” said Stransky. “Taking it one step further – we’ve run the same exercise for AWS for one day, through the Fortune 1000 only, and the losses are about $3 billion.”

So once you expand it out to millions of businesses, the losses would be much higher,” he added.

The ARC platform allows insurers to assess cyber exposures including “silent cyber,” across the spectrum of business, be it D&O, E&O, general liability or property. There are 18 scenarios that can be modeled, with the capability to adjust variables broadly for a better handle on events of varying severity and scope.

Looking ahead, AIR is taking a closer look at what Stransky calls “silent silent cyber,” the complex indirect and difficult to assess or insure potential impacts of any given cyber event.

Stransky cites the 2014 hack of the National Weather Service website as an example. For several days after the hack, no satellite weather imagery was available to be fed into weather models.

Imagine there was a hurricane happening during the time there was no weather service imagery,” he said. “[So] the models wouldn’t have been as accurate; people wouldn’t have had as much advance warning; they wouldn’t have evacuated as quickly or boarded up their homes.”

It’s possible that the losses would be significantly higher in such a scenario, but there would be no way to quantify how much of it could be attributed to the cyber attack and how much was strictly the result of the hurricane itself.

It’s very, very indirect,” said Stransky, citing the recent hack of the Dallas tornado sirens as another example. Not only did the situation jam up the 911 system, potentially exacerbating any number of crisis events, but such a false alarm could lead to increased losses in the future.

The next time if there’s a real tornado, people make think, ‘Oh, its just some hack,’ ” he said. “So if there’s a real tornado, who knows what’s going to happen.”

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Modeling for “silent silent cyber” remains elusive. But platforms like ARC are a step in the right direction for ensuring the continued health and strength of the insurance industry in the face of the ever-changing specter of cyber exposure.

Because we have this model, insurers are now able to manage the risks better, to be more resilient against cyber attacks, to really understand their portfolios,” said Stransky. “So when it does happen, they’ll be able to respond, they’ll be able to pay out the claims properly, they’ll be prepared.

The purpose of having this model is to make the world more resilient … that’s really the goal.”

Additional stories from RIMS 2017:

Blockchain Pros and Cons

If barriers to implementation are brought down, blockchain offers potential for financial institutions.

Embrace the Internet of Things

Risk managers can use IoT for data analytics and other risk mitigation needs, but connected devices also offer a multitude of exposures.

Feeling Unprepared to Deal With Risks

Damage to brand and reputation ranked as the top risk concern of risk managers throughout the world.

Reviewing Medical Marijuana Claims

Liberty Mutual appears to be the first carrier to create a workflow process for evaluating medical marijuana expense reimbursement requests.

Cyber Threat Will Get More Difficult

Companies should focus on response, resiliency and recovery when it comes to cyber risks.

RIMS Conference Held in Birthplace of Insurance in US

Carriers continue their vital role of helping insureds mitigate risks and promote safety.

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