2222222222

Business Interruption Risk

Protecting Data Supply Chains

The biggest risk for many companies is a cyber attack to a third-party data vendor. Insurers are taking note, but gaps in cover remain.
By: | May 2, 2017 • 5 min read

Companies in all sectors are outsourcing data management to third-party vendors and cloud providers. U.S. data centers generated revenues exceeding $100 billion in 2015, and Research and Markets projected the data outsourcing market will grow at more than 5 percent annually until 2021.

Advertisement




Meanwhile, International Data Corp. predicted global spending on public cloud computing will more than double to $195 billion in 2020, from $96 billion in 2016, and that the number of new cloud-based solutions will triple over the next four to five years.

While risk managers and insurers have a good grip on the risks posed to employee or customer data, less attention has been paid to the business interruption (BI) risks companies could face if a third-party vendor’s service is compromised.

A cyber attack on a vendor could result in a company being denied access to data or the malicious destruction or modification of its data, said Joe Pennell, partner in Mayer Brown’s technology transactions practice.

For certain industries, the interruption of data flow could result in a shutdown, preventing production or the transfer of money. In sectors such as manufacturing, this scenario could be much more financially damaging than a privacy breach.

Data Supply Chains

While some cyber risk is unavoidable, organizations can take steps to strengthen their data supply chains. The first, said Shiraz Saeed, cyber national practice leader for Starr Cos., is to conduct a thorough audit of their own computer networks to establish every potential touchpoint where they could be exposed.

If possible, this should extend to the contingent BI (CBI) exposures of key suppliers that might be impacted if their own vendors suffer an attack or outage.

Shiraz Saeed, cyber national practice leader, Starr Cos.

According to PwC, 74 percent of companies in 2015 didn’t have a complete inventory of all third parties that handle customer and employee data, and 73 percent lacked incident response processes to report and manage breaches to these third parties.

While a company may have many network exposure points, the data vendor is usually the most important as it may have direct responsibility for business-critical data. Selecting the right vendor is therefore crucial, as is conducting due diligence and risk assessments on them.

Companies should ask to see documentation relating to the vendor’s redundancies and disaster recovery procedures, and talk to other customers to corroborate any assurances the vendor offers in the negotiating process “just as you would when you make any other important purchase,” Saeed said.

Pennell also urged firms to watch news alerts on data suppliers, conduct audit questionnaires, and send written correspondence demanding that any identified problems be fixed.

Ensuring contracts are watertight and favorable is also an important step.

“Security failures and privacy events can happen, so you should determine a mutual, amicable exchange in the event of an incident, just as you would for a slip and fall, and this should be outlined in the contract,” Saeed said. “Vendors are your partners and shouldn’t hold you responsible for everything.”

Mayer Brown partner Brad Peterson added that companies should build contracts with clear, enforceable commitments, options and incentives.

“In addition to business continuity and backup requirements, the contract should require third-party certifications such as ISO 27000 certification or ISAE 3402 audit reports, notice of data security incidents, and early warnings on technical and financial risks,” he said.

Incident Response

It is also essential companies have their own “Plan B” in case a vendor’s service is interrupted.

Steve Bridges, SVP, cyber/E&O practice, JLT Specialty USA

“Maintain backups of key data under your control or control of a separate supplier. Have alternate sources for necessary data feeds, and leverage technologies such as blockchain where possible to reduce the risk of malicious modification,” Peterson said.

Steve Bridges, SVP of the cyber/E&O practice at JLT Specialty USA, urged all organizations to develop and test response plans to ensure they are prepared for potential data interruption.

“Companies should have procedures in place and work through those plans so it is clear who gets called, when, and what resources need to be brought in to deal with the situation,” he said, adding that steps like this will also help companies negotiate terms with their insurers.

“Vendors are your partners and shouldn’t hold you responsible for everything.” — Shiraz Saeed, cyber national practice leader, Starr Cos.

“We look at an organization’s overall cyber security and maturity, and really dig into their response, recovery and continuity plans,” said Saeed, adding: “It’s not about finding risks that are impenetrable, but those that turn themselves from soft targets to hard targets.”

Insurance Coverage

Cyber CBI cover can theoretically be obtained under three types of policy — stand-alone cyber, property (typically covering only physical losses from an interruption), and kidnap & ransom (for ransomware attacks).

“Insureds must identify where there are overlaps and gaps between different types of policies, and dovetail their coverage so they know what is covered and excluded in each policy,” said Jill Dalton, managing director at Aon Risk Consulting.

She noted that property underwriters typically put sublimits on cyber CBI coverage, and often exclude it altogether.

Some policies will respond, added Bridges, but the insured has to be down for an agreed number of hours before coverage kicks in.

A further concern for underwriters is the aggregation of risk within their portfolios if numerous insureds are using the same data vendor.

Paul Bantick, Beazley’s technology media and business services focus group leader, said collaboration between cyber and property underwriters is needed.

“People have been addressing the issue of risk accumulation in property BI policies for years and we should work with property underwriters to come up with solutions.”

Advertisement




According to Bantick, the last year has seen a number of cyber insurers offer CBI cover with no sublimit. Beazley itself is one of the few insurers developing “holistic” cyber coverages that effectively provide cover for all risks, including CBI.

“Manufacturing, industrial, energy and marine-type accounts, which haven’t historically bought cyber cover, are now coming to market. BI issues are the main drivers of demand, and they want full limits, without having to rely on being covered under another policy,” Bantick said.

He predicted that CBI will eventually be standard in cyber policies for these industries. Whether that happens across the board is unclear, but at least those who need it can now access protection from selected carriers.

“Most people in our industry understand that network interruption claims are going to increase and there will be growing demand for better, broader coverage,” said Bridges. &

Antony Ireland is a London-based financial journalist. He 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.”

Advertisement




“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.

Advertisement




“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?

Advertisement




“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.