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Risk Insider: Phil Norton

Ponemon Go!

By: | August 10, 2017 • 3 min read
Phil Norton is President, Professional Liability for the retail brokerage division of Arthur J. Gallagher & Co., and is regarded as one of the world’s leading authorities in his field. He has been named a Risk and Insurance® Power Broker® seven times. He can be reached at [email protected]

The Ponemon Institute has been doing cyber-risk research reports on U.S. companies for more than a decade, and several years ago began collecting information from companies outside of the U.S. In June, they released their 2017 Cost of Data Breach Study – Global Overview (sponsored by IBM Security).

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Cyber events now rank among the top three triggers for D&O derivative actions (along with M&A activity and environmental issues). Given the rising importance of cyber security and widespread misunderstandings on this subject, it is worth examining the report’s findings.  This study includes information from 419 companies of median size (in excess of 1,000 employees), of which 63 are from the U.S. The following are a few of the more important takeaways.

This study is broadly distributed and contains information on 17 different industries. Over multiple studies conducted by Ponemon, we have seen the industry-to-industry variance in breach costs as one of the most valuable deliverables. For example, health care companies experience per-record breach costs that are twice that of retail companies.

As breaches get larger, the cost increase is not linear.

Most importantly, while each company surveyed reported at least one breach, the number of records breached was confined to a range of less than 100,000. Prior studies also omitted reporting on large breaches. Anything significantly more than 100,000 records is apparently excluded by design. While avoiding outliers is especially helpful for comparing studies year over year, be wary of extrapolating conclusions regarding the cost of larger breaches.

Knowing that U.S. companies surveyed by Ponemon reported total breach costs averaging $7.35 million may be of limited value, but saying the U.S. cost went up 5 percent from a year ago is illuminating. Surprisingly, non-U.S. company results were down 10 percent compared to a year ago. Of course, note that Ponemon does not survey the same companies each year, so even comparisons have a margin for error.

The most talked about statistic from the Ponemon study is the breach cost per compromised record. Historically in the neighborhood of $200 per record, this has been widely misunderstood. The accompanying pie chart details the components given in the Ponemon study that go into their cost calculation.

Note that the majority of “costs” is due to losing customers (churning), which is not applicable to cyber insurance. Ponemon tracks the full “cost” of the breach — not a number we use to assess cyber risk for the purposes of insurance.

Beyond the 56 percent of cost related to churning, Ponemon’s detection costs include audit services and board communications, and their post data-breach costs may include product discounts. These “risk management” activities may be necessary, but they are not insurable.

For small breaches (3,000 to 100,000 records) maybe 30 percent of the costs cited by Ponemon are insurable. As breaches get larger, the cost increase is not linear. A data breach involving 40,000 records costs about 60 percent (not 100 percent) more than a 20,000-record breach.  As breaches get larger, the cost increases flatten even more.

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Another highlight of the study is determining the root cause of data breaches. In the U.S., malicious or criminal attacks are responsible for half of the breaches, while system glitches and human error account evenly for the other half. But don’t underestimate the impact of employees. Some of the malicious attacks are perpetrated by ex-employees, and current employees may create glitches or plant malware. Still, the most rapidly growing trend is non-employee hacking, including ransomware.

As a finishing thought, the Ponemon Global study concludes that surveyed companies have a 27.7 percent likelihood of a material data breach over the next two years. It also identifies the three most effective factors for reducing breach costs as having an incident response team, making extensive use of encryption and training employees to detect and reduce cyber risks. Cyber insurance complements such effective risk management strategies in minimizing the likelihood of a breach as well as lessening the ultimate impact of cyber exposures.

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The R&I Editorial Team can be reached at [email protected]