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).


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.


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.

More from Risk & Insurance

More from Risk & Insurance

Risk Focus: Cyber

Expanding Cyber BI

Cyber business interruption insurance is a thriving market, but growth carries the threat of a mega-loss. 
By: | March 5, 2018 • 7 min read

Lingering hopes that large-scale cyber attack might be a once-in-a-lifetime event were dashed last year. The four-day WannaCry ransomware strike in May across 150 countries targeted more than 300,000 computers running Microsoft Windows. A month later, NotPetya hit multinationals ranging from Danish shipping firm Maersk to pharmaceutical giant Merck.


Maersk’s chairman, Jim Hagemann Snabe, revealed at this year’s Davos summit that NotPetya shut down most of the group’s network. While it was replacing 45,000 PCs and 4,000 servers, freight transactions had to be completed manually. The combined cost of business interruption and rebuilding the system was up to $300 million.

Merck’s CFO Robert Davis told investors that its NotPetya bill included $135 million in lost sales plus $175 million in additional costs. Fellow victims FedEx and French construction group Saint Gobain reported similar financial hits from lost business and clean-up costs.

The fast-expanding world of cryptocurrencies is also increasingly targeted. Echoes of the 2014 hack that triggered the collapse of Bitcoin exchange Mt. Gox emerged this January when Japanese cryptocurrency exchange Coincheck pledged to repay customers $500 million stolen by hackers in a cyber heist.

The size and scope of last summer’s attacks accelerated discussions on both sides of the Atlantic, between risk managers and brokers seeking more comprehensive cyber business interruption insurance products.

It also recently persuaded Pool Re, the UK’s terrorism reinsurance pool set up 25 years ago after bomb attacks in London’s financial quarter, to announce that from April its cover will extend to include material damage and direct BI resulting from acts of terrorism using a cyber trigger.

“The threat from a cyber attack is evident, and businesses have become increasingly concerned about the extensive repercussions these types of attacks could have on them,” said Pool Re’s chief, Julian Enoizi. “This was a clear gap in our coverage which left businesses potentially exposed.”

Shifting Focus

Development of cyber BI insurance to date reveals something of a transatlantic divide, said Hans Allnutt, head of cyber and data risk at international law firm DAC Beachcroft. The first U.S. mainstream cyber insurance products were a response to California’s data security and breach notification legislation in 2003.

Jimaan Sané, technology underwriter, Beazley

Of more recent vintage, Europe’s first cyber policies’ wordings initially reflected U.S. wordings, with the focus on data breaches. “So underwriters had to innovate and push hard on other areas of cyber cover, particularly BI and cyber crimes such as ransomware demands and distributed denial of service attacks,” said Allnut.

“Europe now has regulation coming up this May in the form of the General Data Protection Regulation across the EU, so the focus has essentially come full circle.”

Cyber insurance policies also provide a degree of cover for BI resulting from one of three main triggers, said Jimaan Sané, technology underwriter for specialist insurer Beazley. “First is the malicious-type trigger, where the system goes down or an outage results directly from a hack.

“Second is any incident involving negligence — the so-called ‘fat finger’ — where human or operational error causes a loss or there has been failure to upgrade or maintain the system. Third is any broader unplanned outage that hits either the company or anyone on which it relies, such as a service provider.”

The importance of cyber BI covering negligent acts in addition to phishing and social engineering attacks was underlined by last May’s IT meltdown suffered by airline BA.

This was triggered by a technician who switched off and then reconnected the power supply to BA’s data center, physically damaging servers and distribution panels.

Compensating delayed passengers cost the company around $80 million, although the bill fell short of the $461 million operational error loss suffered by Knight Capital in 2012, which pushed it close to bankruptcy and decimated its share price.

Mistaken Assumption

Awareness of potentially huge BI losses resulting from cyber attack was heightened by well-publicized hacks suffered by retailers such as Target and Home Depot in late 2013 and 2014, said Matt Kletzli, SVP and head of management liability at Victor O. Schinnerer & Company.


However, the incidents didn’t initially alarm smaller, less high-profile businesses, which assumed they wouldn’t be similarly targeted.

“But perpetrators employing bots and ransomware set out to expose any firms with weaknesses in their system,” he added.

“Suddenly, smaller firms found that even when they weren’t themselves targeted, many of those around them had fallen victim to attacks. Awareness started to lift, as the focus moved from large, headline-grabbing attacks to more everyday incidents.”

Publications such as the Director’s Handbook of Cyber-Risk Oversight, issued by the National Association of Corporate Directors and the Internet Security Alliance fixed the issue firmly on boardroom agendas.

“What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.” — Jimaan Sané, technology underwriter, Beazley

Reformed ex-hackers were recruited to offer board members their insights into the most vulnerable points across the company’s systems — in much the same way as forger-turned-security-expert Frank Abagnale Jr., subject of the Spielberg biopic “Catch Me If You Can.”

There also has been an increasing focus on systemic risk related to cyber attacks. Allnutt cites “Business Blackout,” a July 2015 study by Lloyd’s of London and the Cambridge University’s Centre for Risk Studies.

This detailed analysis of what could result from a major cyber attack on America’s power grid predicted a cost to the U.S. economy of hundreds of billions and claims to the insurance industry totalling upwards of $21.4 billion.

Lloyd’s described the scenario as both “technologically possible” and “improbable.” Three years on, however, it appears less fanciful.

In January, the head of the UK’s National Cyber Security Centre, Ciaran Martin, said the UK had been fortunate in so far averting a ‘category one’ attack. A C1 would shut down the financial services sector on which the country relies heavily and other vital infrastructure. It was a case of “when, not if” such an assault would be launched, he warned.

AI: Friend or Foe?

Despite daunting potential financial losses, pioneers of cyber BI insurance such as Beazley, Zurich, AIG and Chubb now see new competitors in the market. Capacity is growing steadily, said Allnutt.

“Not only is cyber insurance a new product, it also offers a new source of premium revenue so there is considerable appetite for taking it on,” he added. “However, whilst most insurers are comfortable with the liability aspects of cyber risk; not all insurers are covering loss of income.”

Matt Kletzli, SVP and head of management liability, Victor O. Schinnerer & Company

Kletzli added that available products include several well-written, broad cyber coverages that take into account all types of potential cyber attack and don’t attempt to limit cover by applying a narrow definition of BI loss.

“It’s a rapidly-evolving coverage — and needs to be — in order to keep up with changing circumstances,” he said.

The good news, according to a Fitch report, is that the cyber loss ratio has been reduced to 45 percent as more companies buy cover and the market continues to expand, bringing down the size of the average loss.

“The bad news is that at cyber events, talk is regularly turning to ‘what will be the Hurricane Katrina-type event’ for the cyber market?” said Kletzli.

“What’s worse is that with hurricane losses, underwriters know which regions are most at risk, whereas cyber is a global risk and insurers potentially face huge aggregation.”


Nor is the advent of robotics and artificial intelligence (AI) necessarily cause for optimism. As Allnutt noted, while AI can potentially be used to decode malware, by the same token sophisticated criminals can employ it to develop new malware and escalate the ‘computer versus computer’ battle.

“The trend towards greater automation of business means that we can expect more incidents involving loss of income,” said Sané. “What’s possibly of greater concern is the sheer number of different businesses that can be affected by a single cyber attack and the cost of getting them up and running again quickly.

“We’re likely to see a growing number of attacks where the aim is to cause disruption, rather than demand a ransom.

“The paradox of cyber BI is that the more sophisticated your organization and the more it embraces automation, the bigger the potential impact when an outage does occur. Those old-fashioned businesses still reliant on traditional processes generally aren’t affected as much and incur smaller losses.” &

Graham Buck is editor of gtnews.com. He can be reached at riskletters.com.