Risk Scenario

Stabbed in the Back

Internal perpetrators show a company just what it doesn’t know about cyber risk management.
By: | October 15, 2016 • 9 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

Part One: Opportunity Knocks

Jack Fisk, nice and warm in the comfort of his study in Fort Collins, Colorado, sat and stared at the message in his personal email account inbox. He sat and stared at it for a long time.

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Jack took a sip of herbal tea and a nibble of the lemon cookie at his elbow. Then he went back to staring at the message. There it was in black and white, an offer from a Chinese national — an offer he felt he couldn’t refuse.

As a lead engineer with Super Diamond, a manufacturer of mining and drilling equipment, Jack was an integral part of a team that developed one of the most effective drilling bits ever made. The bit, used in gold mining and deep-sea oil extraction, was helping to push Super Diamond into record-breaking revenue territory.

There was only one problem and it was a very big one, for Jack at least. Super Diamond’s top line was breaking records, but Jack Fisk felt left out. Where were his millions, he wondered.

Well here they were. He didn’t know how they found him, but they found him.

The deal was this. Hand over some of Super Diamond’s top-secret product information and receive a seven-figure reward.

As Jack considered the offer, he felt entirely justified in taking it. It was his creativity and knowledge, more than anyone else’s, which led to the product breakthrough. He was sure of it. He knew it in his gut.

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Here’s what Jack didn’t know. Another employee of Super Diamond, an IT executive based in Mumbai, was looking at a very similar email. This employee, Vijay Bhakta, enjoyed super-user status within Super Diamond’s computer networks, with access to all of its servers.

The Chinese had done their homework. Jack, married with two children, lived a pretty straight life. The lure of a big paycheck was more than enough for him.

Vijay enjoyed a riskier lifestyle. Money was a good motivator for him, but just as compelling were the offers of drugs and prostitutes the Chinese were dangling in front of him.

In approaching Vijay, the Chinese were after more than product information. They wanted access to Super Diamond’s customer list and information on its entire product line, not just the drilling bits that Jack helped develop.

Both executives, unbeknownst to the other, took the bait.

For the next 18 months, Jack used the time-honored method of downloading proprietary information onto a thumb drive, walking out the door with it, and painstakingly sending it to his Chinese contact using his personal email address in the quiet comfort of his study at home.

The Bitcoin payments from the Chinese, amounting to $2.7 million in 18 months, arrive faithfully. Jack uploads his company’s precious trade secrets just as faithfully.

Vijay is introduced to a hacker who, armed with the IT exec’s user information and passcodes, invades Super Diamond’s system at will over the same time period.

Vijay is also faithfully compensated, with cash drops and services meeting his other needs, under the terms of his agreement with the Chinese.

At the end of 18 months, fully exploiting their two points of entry, the Chinese own the keys to the Super Diamond kingdom. They know how to make a number of Super Diamond’s products and they know exactly who to sell them to and at what price.

Part Two: A Chilling Recognition

Super Diamond’s risk manager, Cathleen Sunbury, is enjoying an invigorating game of tennis with a friend on a sunlit court in San Diego, when she gets an urgent text from the company’s COO.

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“Please get to the office, ASAP,” says the message. “Urgent.”

A chill runs through Cathleen.

“Uh oh,” she says, as she and her friend grab a water break courtside.

“What is it?” her friend says.

“I don’t know what it is, but it doesn’t look good,” Cathleen says. “I gotta go.”

“Is this because I was winning?” her friend asks.

That would normally be a funny jibe between friends. It’s not today.

At the office, other company executives share with Cathleen what they know. Sales in several of Super Diamond’s key Asian markets have suddenly softened.

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There is also an indication that the company suffered an IT breach, but the extent of it is difficult to ascertain. Whoever broke in did a great job of covering their tracks. What was accessed and what was taken appear to be unknowns. The company’s IT department is at a loss.

“I know who to call,” Sunbury says, banking on a conversation she had with a former higher-up in the FBI who now works for a cyber forensics firm in Philadelphia.

The Super Diamond CEO and CFO initially balk at the forensic firm’s price tag.

The vice president of the forensic firm, who led key cyber investigations for the FBI before entering the private sector, snorts in derision.

“Your company is horrible at this,” the forensics VP says.

“Your IT department has no idea what happened and it will take them months to figure it out,” he says.

“It’s looking like you have an internal perpetrator, possibly more than one. How much longer can you afford to wait to determine what’s going on?”

The phrase “possibly more than one” overwhelms any resistance on the part of the CFO and the CEO. They sign on the dotted line with the forensics firm.

The forensic firm gets right to work. To connect the dots they pull records from a number of departments, including Human Resources and Security.

They also have their own cyber security specialist take a look at the Super Diamond network to see who might have compromised it.

It takes the forensics firm two days to come up with two names: Jack Fisk and Vijay Bhakta.

Part Three: Gone, Gone, Gone

Jack Fisk and Vijay Bhakta are dismissed and face criminal charges. As painful as that is for company executives, that’s the easy part.

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What comes next for Cathleen Sunbury in her role as risk manager is far more painstaking, and far more painful.

The forensics team is able to match up human resources records, including data on when Vijay Bhakta and Jack Fisk were in the office, against data on computer use, including when an outside device was connected to Jack Fisk’s computer.

That left no doubt that the product information and additional company information that was taken from Super Diamond was the work of inside perpetrators.

The “good” news is that Super Diamond executives now understand what happened. The bad news is that their insurance policies are inadequate to cover the loss.

Determining the value of what was taken, including the cost of lost sales, is difficult, but Super Diamond executives settle on a figure of $200 million.

The company’s cyber breach policy, though, covers an occurrence in the event of a breach from an outside hacker. Bhakta and Fisk are internal perpetrators, and thus the company is not covered, its carrier says.

Compounding the pain, Super Diamond shareholders file suit against Super Diamond executives and board members. The shareholders argue that the board and the C-suites failed to take adequate measures to protect proprietary company information.

The company’s E&O and D&O policies respond to the costs of the lawsuits. But the company faces punishing premium increases for both E&O and D&O coverage going forward.

Sales are depressed, due to the theft of key intellectual property, and getting good cyber coverage at a reasonable price is flat-out impossible.

Super Diamond settles for a premium increase to cover both external and internal hacks that is 400 percent more than it faced the previous year.

Worn out by the process of determining the loss and trying to get coverage for a company that is bleeding money; Cathleen Sunbury resigns.

“I don’t know who we’re going to get to replace you,” the CEO says.

“I don’t know either,” Sunbury says, meaning no disrespect but feeling utterly defeated.

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Risk & Insurance® partnered with Swiss Re Corporate Solutions to produce this scenario. Below are Swiss Re Corporate Solutions’ recommendations on how to prevent the losses presented in the scenario. This perspective is not an editorial opinion of Risk & Insurance®.

Super Diamond’s Cathleen Sunbury might still have her job and her company would be in much better shape had she partnered with Swiss Re Corporate Solutions.

Swiss Re, in addition to offering cyber insurance coverage that would have covered an internal perpetrator incident such as the one detailed in “Stabbed in the Back,” would also advise Sunbury and her fellow executives at Super Diamond on being much better prepared to defend against and respond to it.

Having a forensics team, a crisis (breach) communications partner and the right law firm lined up ahead of time would have saved the company a lot of time and trouble. Swiss Re offers all of that as part of its coverage.

In just one example, imagine the costs that Super Diamond will incur if it has to go after Vijay Bhakta and Jack Fisk in civil court, or what it’s going to spend defending itself against shareholder lawsuits.

Swiss Re Corporate Solutions would have paid for Super Diamond’s legal defense, compensated it for lost revenue, and paid for data reconstitution and additional legal costs as part of its CyberSolutions product.

The lost sales in Asia that Super Diamond experiences when Jack Fisk sells its intellectual property to a Chinese national would also be covered under that policy.

On the front end, Swiss Re Corporate Solutions would work with Super Diamond to identify which of its mining or drilling technologies were most valuable; in other words, naming the “crown jewels” that the company absolutely could not afford to lose control of. That would also involve ascertaining where those “jewels” are stored and who has access to them.

The upfront work would also include the services of experts with IBM who can conduct penetration tests of the company’s IT systems.

In essence, companies everywhere need to understand that any gap in its preparedness or ability to respond creates liability. There is not only the initial liability of a loss or a penetration, there is the multiplying liability of shareholders, or regulators, holding the company responsible for its negligence.

By partnering with Swiss Re Corporate Solutions and picking up its CyberSolutions product, Super Diamond would have bolstered its risk mitigation and vastly improved the efficiency of its response.

No company is safe from a cyber penetration; the record is clear on that.  But experts say many companies have a lot of ground to make up to become more vigilant and better coordinated to bounce back when an incident occurs.

No entity can do this on its own. Pick the right partner(s).




Dan Reynolds is editor-in-chief of Risk & Insurance. 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.”

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“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.

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“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?

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“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.