Legal/Regulatory

Shifting Gears

Driverless car regulations are on the way that will bring about big changes in the insurance industry.
By: | July 31, 2017 • 4 min read

The U.S. Congress is expected this Fall to approve groundbreaking regulations on the production and use of driverless cars. Once the regulations are passed, they will likely bring about significant changes to the insurance industry.

A bill authorizing the expansion of driverless cars was approved on July 19 by the House Subcommittee on Digital Commerce and Consumer Protection and should reach the full House of Representatives in September. Having received support from both Republicans and Democrats in the subcommittee, the odds are that the House will give it the green light.

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Among other provisions, the bill authorizes the deployment of 100,000 driverless cars on American roads without the need to meet all safety regulations that apply to ordinary vehicles. It also prevents states from imposing their own driverless cars rules.

The progress of the bill follows requests by the likes of Ford, Tesla and Volvo for the implementation of rules that will enable carmakers to accelerate the introduction of driverless cars in the market. The main argument is that they will be so safe that the number of road accidents should fall dramatically once intelligent vehicles predominate.

“Nearly 40,000 lives are lost in road crashes every year and nearly 94 percent of those crashes are caused by human error,” said David Strickland, the general counselor of the Self-Driving Coalition for Safer Streets, a lobby group, in a statement released after the bill was approved by the House subcommittee.

“By removing humans from behind the wheel, self-driving vehicles offer the opportunity to save lives and enhance mobility.”

What will also become scarce are auto insurance policies for drivers, one of the main sources of revenues for the global insurance industry.

This will bring about a fundamental shift in the way that auto insurance operates, as liabilities for accidents will shift from drivers to producers of cars.

“There is an opportunity for insurers between now and the next ten to fifteen years.” – Anand S. Rao, Innovation Lead, PwC’s Analytics Group

Product liability should become the main coverage for vehicles circulating on the road, with carmakers purchasing their programs from a reduced number of insurers, said Anand S. Rao, the Innovation Lead at PwC’s Analytics Group.

According to Rao, there will always be some need for individual insurance to protect vehicles from natural events and other losses not linked to road accidents. But the implementation of technologies such as forward collision warning, drowsy driver detection, lane departure sensing and others is likely to remove most of the human risks that constitute the bread-and-butter of today’s auto insurance business.

“Auto insurance will change from a personal line to a business line insurance,” Rao said.

“B2B insurers will end up making deals with car makers. And, in some cases, as we are already seeing in Europe, car manufacturers may opt to keep the liabilities, and transfer them to the reinsurance market.”

In other words, there will be room for a much smaller number of players in the auto insurance market. The good news is that the industry should have some time to prepare itself for this new reality.

Anand Rao, Innovation Lead at PwC’s Analytics Group.

“It may take a few decades before all the changes can happen,” Rao said.

The transition from human controlled cars to completely automated cars should take place gradually, enabling the insurance sector to adapt itself to it. The U.S. National Highway Traffic Safety Administration, or NHTSA, has in fact established a five-level route for the process, where Level 0 means no automation at all and Level 4 implies full self-driving automation.

“There is an opportunity for insurers between now and the next ten to fifteen years,” Rao said. In the short and middle runs, he said, insurers can employ the transition phase to collect data and adapt their prices and products and make a few extra bucks with the emerging technologies.

For example, before driverless cars completely dominate the market, the car industry is likely to offer dual-mode vehicles, where drivers will be able to decide whether they will keep control of the car or let automated systems take over.

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“It will be easy to monitor how long drivers are keeping their hands on the steering wheel, and how long they are shifting to self-drive, and then slice the risk,” he added. A driver’s liability could apply to the periods where drivers keep their hands on the steering wheel, while product liability would take over on self-driving stretches.

“By doing this, they [insurers] can adapt rates and offer specially designed products that could attract more and more drivers who own dual mode vehicles,” Rao added.

Underwriters who prefer to focus on the future B2B opportunities should look for opportunities to collaborate with car makers and understand the emerging technologies, he pointed out.

But not all auto underwriters will be able to arrive unharmed to the end of the journey, as Rao believes that only a few leading players should survive in the auto insurance market once it takes its new shape.

Rodrigo Amaral is a freelance writer specializing in Latin American and European risk management and insurance markets. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Risk Report: Entertainment

On With the Show

Entertainment companies are attractive and vulnerable targets for cyber criminals.
By: | December 14, 2017 • 7 min read

Recent hacks on the likes of Sony, HBO and Netflix highlight the vulnerability entertainment companies have to cyber attack. The threat can take many forms, from the destruction or early release of stolen content to the sabotage of broadcast, production or streaming feeds.

Brian Taliaferro, entertainment and hospitality specialist, JLT Specialty USA

“Cyber attacks are becoming the biggest emerging threat for entertainment companies, bringing risk to reputations, bottom lines and the product itself,” said Brian Taliaferro, entertainment and hospitality specialist, JLT Specialty USA.

For most entertainment firms, intellectual property (IP) is the crown jewel that must be protected at all costs, though risk profiles vary by sub-sector. Maintaining an uninterrupted service may be the biggest single concern for live broadcasters and online streaming providers, for example.

In the case of Sony, North Korea was allegedly behind the leak of stolen private information in 2014 in response to a film casting leader Kim Jong Un in what it considered an unfavorable light.

This year, Netflix and HBO both faced pre-broadcast leaks of popular TV series, and Netflix last year also had its systems interrupted by a hack.

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Online video game platforms are also ripe for attack, with Steam admitting that 77,000 of its gamer accounts are hacked every month.

The list goes on and will only get more extensive over time.

Regardless of the platform, any cyber attack that prevents companies from producing or distributing content as planned can have huge financial implications, particularly when it comes to major releases and marquee content, which can make or break a financial year.

“People and culture are the biggest challenges but also the keys to success.” — David Legassick, head of life science, technology and cyber, CNA Hardy

The bottom line, said David Legassick, head of life science, technology and cyber, CNA Hardy, is that these firms have a combination of both assets and business models that are inherently open to attack.

“Vulnerabilities exist at every point in the supply chain because it’s all tech-dependent,” he said, adding that projects often run on public schedules, allowing criminals to time their attacks to maximize impact.

“The combination of IP, revenue and reputation risk make entertainment a hot sector for cyber criminals.”

Touch Point Vulnerabilities

Film, TV, literary and music projects invariably involve numerous collaborators and third-party vendors at every stage, from development to distribution. This creates multiple touchpoints through which hackers could gain access to materials or systems.

According to Kyle Bryant, regional cyber manager, Europe, for Chubb, there is nothing unique about the type of attack media companies suffer — usually non-targeted ransomware attacks with a demand built in.

“However, once inside, the hackers often have a goldmine to exploit,” he said.

He added targeted attacks can be more damaging, however. Some sophisticated types of ransomware attack, for example, are tailored to detect certain file types to extract or destroy.

“NotPetya was designed to be non-recoverable. For a media company, it could be critical if intellectual property is destroyed.”

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As entertainment companies have large consumer bases, they are also attractive targets for ideological attackers wishing to spread messages by hijacking websites and other media, he added.

They also have vast quantities of personal information on cast and crew, including celebrities, which may also have monetary value for hackers.

“It is essential to identify the most critical information assets and then put a value on them. After that, it is all about putting protection in place that matches the level of concern,” Bryant advised.

As with any cyber risk, humans are almost always the biggest point of vulnerability, so training staff to identify risks such as suspicious messages and phishing scams, as well as security and crisis response protocols, is essential. Sources also agree it is vital for entertainment companies to give responsibility for cyber security to a C-suite executive.

“People and culture are the biggest challenges but also the keys to success,” said Legassick.

“Managing the cyber threat is not a job that can just be left to the IT team. It must come from the top and pervade every aspect of how a company works.”

David Legassick, head of life science, technology and cyber, CNA Hardy

Joe DePaul, head of cyber, North America, Willis Towers Watson, suggested entertainment companies adopt a “holistic, integrated approach to cyber risk management,” which includes clearly defining processes and conducting background checks on the cyber security of any third party that touches the IP.

This includes establishing that the third parties understand the importance of the media they are handling and have appropriate physical and non-physical security at least equal to the IP owner in place. These requirements should also be written into contracts with vendors, he added.

“The touchpoints in creating content used to be much more open and collaborative, but following the events of the last few years, entertainment firms have rapidly introduced cyber and physical security to create a more secure environment,” said Ryan Griffin, cyber specialist, JLT Specialty USA.

“These companies are dealing with all the issues large data aggregators have dealt with for years. Some use secure third-party vendors, while others build their own infrastructure. Those who do business securely and avoid leaks can gain an advantage over their competitors.”

Quantification Elusive

If IP is leaked or destroyed, there is little that can be done to reverse the damage. Insurance can cushion the financial blow, though full recovery is very difficult to achieve in the entertainment space, as quantifying the financial impact is so speculative.

As Bill Boeck, insurance and claims counsel, Lockton, pointed out, there are only “a handful of underwriters in the world that would even consider writing this risk,” and sources agreed that even entertainment firms themselves struggle to put a monetary value on this type of exposure.

“The actual value of the IP taken isn’t generally going to be covered unless you have negotiated a bespoke policy,” said Boeck.

“If you’re in season five of a series with a track record and associated income stream, that is much easier, but putting a value on a new script, series or novel is difficult.”

Companies for whom live feeds or streaming are the primary source of revenue may find it easier to recoup losses. Determining the cost of a hack of that sort of service is a more easily quantifiable business interruption loss based on minutes, hours, ad dollars and subscription fees.

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Brokers and insurers agree that while the cyber insurance market has not to date developed specific entertainment products, underwriters are open for negotiation when it comes to covering IP. The ball is therefore in the insured’s court to bring the most accurate projections to the table.

“Clients can get out of the insurance market what they bring to the equation. If you identify your concerns and what you want to get from insurance, the market will respond,” said Bryant.And according to Griffin, entertainment companies are working with their brokers to improve forecasts for the impact of interruptions and IP hacks and to proactively agree to terms with underwriters in advance.

However, Legassick noted that many entertainment firms still add cyber extensions to their standard property policies to cover non-physical damage business interruption, and many may not have the extent of coverage they need.

Crisis Response

Having a well-planned and practiced crisis response plan is critical to minimizing financial and reputational costs. This should involve the input of experienced, specialist third parties, as well as numerous internal departments.

Ryan Griffin, cyber specialist, JLT Specialty USA

“The more business operation leaders can get involved the better,” said Griffin.

Given the entertainment industry’s highly public nature, “it is critically important that the victim of a hack brings in a PR firm to communicate statements both outside and within the organization,” said Boeck, while DePaul added that given that most cyber attacks are not detected for 200-plus days, bringing in a forensic investigator to determine what happened is also essential.

Indeed, said Griffin, knowing who perpetrated the attack could help bring the event to a swifter and cheaper conclusion.

“Is it a nation state upset about the way it’s been portrayed or criminals after a quick buck? Understanding your enemy’s motivation is important in mitigating the damage.”

Some hackers, he noted, have in the past lived up to their word and released encryption keys to unlock stolen data if ransoms are paid. Inevitably, entertainment firms won’t always get so lucky.

Given the potentially catastrophic stakes, it is little surprise these firms are now waking up to the need for robust crisis plans and Fort Knox-level security for valuable projects going forward. &

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