Public Sector Risk

Public Sector Upgrading Cyber Security

States have launched initiatives ranging from cyber academies and public-private partnerships to dashboards, and cyber preparedness and response plans.
By: | October 28, 2016 • 5 min read

Public sector risk managers and experts alike say much more needs to be done about cyber security to translate awareness into concrete actions that protect sensitive data.

Advertisement




Only one-third (29 percent) of IT managers in state governments provide their governors with monthly reports on cyber security, compared with only 17 percent in 2014, according to a joint report from Deloitte and the National Association of State Chief Information Officers (NASCIO).

That level of communication has not yet extended to state legislatures, according to the study, “State Governments at Risk: Turning Strategy and Awareness into Progress,” which surveyed 96 state business and elected officials.

Nearly one-third of respondents said they “never communicate” with their legislatures, unchanged from 2014 — which is “an important consideration, given the legislature’s role in appropriating funds,” according to the report.

Still, many states are starting to act and make progress in areas visible to governors.

More than half (54 percent) of respondents said they have implemented at least some of the cyber security recommendations by the National Governors Association, compared with only one-third (33 percent) in 2014.

Mark Raymond, chief information officer, State of Connecticut

Mark Raymond, chief information officer, State of Connecticut

Governors in a number of states have launched initiatives ranging from state cyber academies and public-private partnerships to dashboards, and preparedness and response plans.

The 2016 survey results are the first time there is “some significant traction around the issue,” said Mark Raymond, chief information officer for the State of Connecticut and president of the National Association of State Chief Information Officers based in Lexington, Ken.

“It’s not just about the increased risk and threat, but there are states that are making positive progress in articulating a strategy to increase awareness around what they are doing to reduce the risk,” Raymond said.

Public entities need to take a hard look at all of their computer technology — both hardware and software — and question the totality of access and whether each individual’s access is necessary and appropriate, said Marilyn Rivers, risk manager for the city of Saratoga Springs, N.Y.

“Risk managers need to take a trip to their server rooms and examine the security and access,” Rivers said. “Ask about password control and the regular backup of the information that flows throughout their organizations on an hourly and daily basis.

“Ask how your organization protects itself from all the hand-held mobile devices your employees use or the laptops taken home for work projects,” she said.

She said public sector risk managers should have a plan for what would happen if information stops flowing throughout the organization. Do you have a backup separate from the live system? Can your government recreate itself if held hostage?

Rivers also said public sector risk managers should examine access to websites, including which websites are visited by employees and what tracking cookies are involved.

“Every public entity is facing an urgent cyber crisis that is dynamic and in constant change,” Rivers said. “It is vitally important to all of us as we govern collectively to identify our network access and vulnerabilities and invest in technology and people to assist us in managing this global risk frontier.”

Barry Scott, deputy director of finance and risk manager, City of Philadelphia

Barry Scott, deputy director of finance and risk manager, City of Philadelphia

It is also important for public sector risk managers to invest in a comprehensive insurance program that assists in mitigating and managing the cost of the risks their governmental entity faces, she said.

Barry Scott, deputy director of finance and risk manager for the City of Philadelphia, said that it’s critical that his team strives “to ensure that every city department bears the responsibility for managing information correctly.”

“The first layer is trying to make sure that people are smart in how they manage the information we have about residents and businesses in the city, and storing the information in the proper format,” Scott said. “That helps work with the IT layer, so that appropriate security can be placed to protect that information.”

The public sector also faces a somewhat unique set of challenges — in order to add more resources to the organization’s capabilities, the tax base needs to be engaged, he said.

“Our citizens need to be aware that the services they seek, namely, the ease of access to their information that automated systems bring, have some issues in terms of security and protection — and those services have a cost which we as citizens have to bear,” Scott said.

“One of our biggest challenges as a public entity with finite resources is getting the best value in our resources — and in an increasingly digital world, cyber security is a priority.”

Advertisement




Raymond of NASCIO recommended that IT professionals and risk management departments in the public sector measure where their organizations are on the “cyber risk scale,” what kind of data they have and how they are protecting it.

“You can’t improve the things that are you are not measuring,” Raymond said. “Once you understand the value of that data, you need to determine what controls are needed to be put in place to protect the data.”

Then IT and risk management need to articulate their strategies to the executive management team in a way that enables them to understand both the threat and the efforts around it in a concise manner, he said.

Once executive management clearly understands what can be done about cyber security risks, they can appropriately prioritize resources to reduce exposure.

“States not only have to mitigate for financial risk of data loss or theft from state accounts, but also for the loss of data containing people’s personal information from many sources like birth and death certificates,” Raymond said.

Kristin Judge, director of special projects, National Cyber security Alliance

Kristin Judge, director of special projects, National Cyber security Alliance

“State governments also need to be aware of how cyber attacks can result in lost productivity, lost trust of government, and increased risk of bad decisions — such as a cyber criminals directing the state to let someone out of jail who isn’t supposed to be, or putting someone in jail that’s not supposed to be there.”

Kristin Judge, director of special projects at the National Cyber Security Alliance in Washington, D.C., said her group stresses to public sector risk managers that they must communicate that their entire governmental organization has responsibility for cyber security, and that all workers must be part of the solution.

“We want people to create a culture of cyber security, and just as they have fire drills, they should also have cyber security drills like checking the quality of backups and the process for restoring data, for example,” Judge said.

“It’s also very important to have training, as 90 percent of attacks do not come from sophisticated code meant to break through IT security systems, but rather from employees just clicking on phishing emails — so 90 percent of attacks can be stopped by trained staff.”

Katie Kuehner-Hebert is a freelance writer based in California. She has more than two decades of journalism experience and expertise in financial writing. She can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Liability

Fresh Worries for Boards of Directors

New cyber security regulations increase exposure for directors and officers at financial institutions.
By: | June 1, 2017 • 6 min read

Boards of directors could face a fresh wave of directors and officers (D&O) claims following the introduction of tough new cybersecurity rules for financial institutions by The New York State Department of Financial Services (DFS).

Advertisement




Prompted by recent high profile cyber attacks on JPMorgan Chase, Sony, Target, and others, the state regulations are the first of their kind and went into effect on March 1.

The new rules require banks, insurers and other financial institutions to establish an enterprise-wide cybersecurity program and adopt a written policy that must be reviewed by the board and approved by a senior officer annually.

The regulation also requires the more than 3,000 financial services firms operating in the state to appoint a chief information security officer to oversee the program, to report possible breaches within 72 hours, and to ensure that third-party vendors meet the new standards.

Companies will have until September 1 to comply with most of the new requirements, and beginning February 15, 2018, they will have to submit an annual certification of compliance.

The responsibility for cybersecurity will now fall squarely on the board and senior management actively overseeing the entity’s overall program. Some experts fear that the D&O insurance market is far from prepared to absorb this risk.

“The new rules could raise compliance risks for financial institutions and, in turn, premiums and loss potential for D&O insurance underwriters,” warned Fitch Ratings in a statement. “If management and directors of financial institutions that experience future cyber incidents are subsequently found to be noncompliant with the New York regulations, then they will be more exposed to litigation that would be covered under professional liability policies.”

D&O Challenge

Judy Selby, managing director in BDO Consulting’s technology advisory services practice, said that while many directors and officers rely on a CISO to deal with cybersecurity, under the new rules the buck stops with the board.

“The common refrain I hear from directors and officers is ‘we have a great IT guy or CIO,’ and while it’s important to have them in place, as the board, they are ultimately responsible for cybersecurity oversight,” she said.

William Kelly, senior vice president, underwriting, Argo Pro

William Kelly, senior vice president, underwriting at Argo Pro, said that unknown cyber threats, untested policy language and developing case laws would all make it more difficult for the D&O market to respond accurately to any such new claims.

“Insurers will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure,” he said.

Going forward, said Larry Hamilton, partner at Mayer Brown, D&O underwriters also need to scrutinize a company’s compliance with the regulations.

“To the extent that this risk was not adequately taken into account in the first place in the underwriting of in-force D&O policies, there could be unanticipated additional exposure for the D&O insurers,” he said.

Michelle Lopilato, Hub International’s director of cyber and technology solutions, added that some carriers may offer more coverage, while others may pull back.

“How the markets react will evolve as we see how involved the department becomes in investigating and fining financial institutions for noncompliance and its result on the balance sheet and dividends,” she said.

Christopher Keegan, senior managing director at Beecher Carlson, said that by setting a benchmark, the new rules would make it easier for claimants to make a case that the company had been negligent.

“If stock prices drop, then this makes it easier for class action lawyers to make their cases in D&O situations,” he said. “As a result, D&O carriers may see an uptick in cases against their insureds and an easier path for plaintiffs to show that the company did not meet its duty of care.”

Advertisement




One area that regulators and plaintiffs might seize upon is the certification compliance requirement, according to Rob Yellen, executive vice president, D&O and fiduciary liability product leader, FINEX at Willis Towers Watson.

“A mere inaccuracy in a certification could result in criminal enforcement, in which case it would then become a boardroom issue,” he said.

A big grey area, however, said Shiraz Saeed, national practice leader for cyber risk at Starr Companies, is determining if a violation is a cyber or management liability issue in the first place.

“The complication arises when a company only has D&O coverage, but it doesn’t have a cyber policy and then they have to try and push all the claims down the D&O route, irrespective of their nature,” he said.

“Insurers, on their part, will need to account for the increased exposures presented by these new regulations and charge appropriately for such added exposure.” — William Kelly, senior vice president, underwriting, Argo Pro

Jim McCue, managing director at Aon’s financial services group, said many small and mid-size businesses may struggle to comply with the new rules in time.

“It’s going to be a steep learning curve and a lot of work in terms of preparedness and the implementation of a highly detailed cyber security program, risk assessment and response plan, all by September 2017,” he said.

The new regulation also has the potential to impact third parties including accounting, law, IT and even maintenance and repair firms who have access to a company’s information systems and personal data, said Keegan.

“That can include everyone from IT vendors to the people who maintain the building’s air conditioning,” he said.

New Models

Others have followed New York’s lead, with similar regulations being considered across federal, state and non-governmental regulators.

The National Association of Insurance Commissioners’ Cyber-security Taskforce has proposed an insurance data security model law that establishes exclusive standards for data security and investigation, and notification of a breach of data security for insurance providers.

Once enacted, each state would be free to adopt the new law, however, “our main concern is if regulators in different states start to adopt different standards from each other,” said Alex Hageli, director, personal lines policy at the Property Casualty Insurers Association of America.

“It would only serve to make compliance harder, increase the cost of burden on companies, and at the end of the day it doesn’t really help anybody.”

Advertisement




Richard Morris, partner at law firm Herrick, Feinstein LLP, said companies need to review their current cybersecurity program with their chief technology officer or IT provider.

“Companies should assess whether their current technology budget is adequate and consider what investments will be required in 2017 to keep up with regulatory and market expectations,” he said. “They should also review and assess the adequacy of insurance policies with respect to coverages, deductibles and other limitations.”

Adam Hamm, former NAIC chair and MD of Protiviti’s risk and compliance practice, added: “With New York’s new cyber regulation, this is a sea change from where we were a couple of years ago and it’s soon going to become the new norm for regulating cyber security.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]