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Technology

Be Wary of ‘Bear Raiders’

Allegations of short-selling based on cyber security rumors create a new vulnerability for risk managers.
By: | April 7, 2017 • 6 min read

Allegations of lax cyber security were responsible for driving down the stock price of a major medical device-maker last summer, even though data was not accessed.

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It is yet another cyber risk that companies need to be wary of.

And even though the device-maker’s vulnerability may have been merely rumor-mongering in an attempt to drive down the stock price, it is a reminder that insureds must work closely with their brokers to ensure there are no gaps between where traditional cyber cover ends, and where policies covering directors and officers (D&O), or errors and omissions (E&O) begin.

“Where business goes, the bad guys follow.” — Steve Bridges, senior vice president of cyber risk and E&O, JLT US Specialty

The case involved St. Jude Medical. It isn’t the only example of possibly short-selling a stock for profit, but it became a bellwether that got everyone’s attention.

The incident occurred when a cyber security operation called MedSec, in collaboration with a hedge fund called Muddy Waters, went public in August 2016 with allegations that pacemakers made by St. Jude Medical were vulnerable to hacking. The company’s stock declined, to the delight of short sellers.

Within weeks of the bear raid, St. Jude Medical sued MedSec and Muddy Waters for defamation.

“The complaint alleged that Muddy Waters sought financial gain ‘by publicly disseminating false and unsubstantiated information’ that frightened and misled patients,” according to the “National Law Review.”

St Jude also “took additional measures to assure patients that cyber security was a priority. In October, St. Jude Medical announced that it had formed a Cybersecurity Medical Advisory Board,” according to the “National Law Review.”

“Further, when the FDA announced that it had identified cyber security vulnerabilities, St. Jude Medical responded the same day with a statement and a software fix that had received the FDA’s stamp of approval.”

By the end of 2016, the Food and Drug Administration issued “final guidance on the post-market management of medical device cybersecurity,” according to a blog by Suzanne B. Schwartz, associate director for science and strategic partnerships at the FDA’s Center for Devices and Radiological Health.

“The best way to combat these threats is for manufacturers to consider cyber security throughout the total product lifecycle of a device,” Schwartz wrote.

“In other words, manufacturers should build in cyber security controls when they design and develop the device to assure proper device performance in the face of cyber threats, and then they should continuously monitor and address cyber security concerns once the device is on the market and being used by patients.”

With doctors and lawyers expressing consternation about the incident, underwriters are urging their insureds to be rigorous in the assessments of their own cyber security, and to take advantage of the capabilities that carriers have assembled for dealing with breaches.

Steve Bridges, senior vice president of cyber risk and E&O, JLT US Specialty

“We have been talking to our clients a lot lately about the new reality of the economy having moved mostly online and relying on networks,” said Steve Bridges, senior vice president of cyber risk and E&O at JLT US Specialty.

“Where business goes, the bad guys follow. The instance of short-sellers profiting from accusations they have floated about a company’s vulnerability is just the online version of the rumors and allegations that have gone on in financial markets from the earliest days.”

There may be more of it now, or it may just be the same level of bear-raiding that just moves faster and wider over electronic media.

One pernicious new angle is a data breach where confidential information about business transactions are accessed, although data is not stolen or damaged.

“We know there have been instances where law firms have been hacked and information about pending deals or other confidential information has been used to trade on companies,” Bridges said. “

Even if it seems as if nothing was stolen or no damage was done, there is still a breach of confidentiality. But then you look at the actual loss, and it can be difficult to determine who was harmed.

“Network security is now a very important part of due diligence before mergers, acquisitions or divestitures,” said Bridges.

He said that a loss in such a situation might fall in a gap somewhere between a cyber policy and a more conventional D&O policy.

“There could also be a reputational risk, but there is not meaningful reputational coverage out there yet.”

In a case like St. Jude’s there does not seem to be a trigger for cyber coverage. “It was reputational,” said Robert Rosenzweig, national cyber risk practice leader at Risk Strategies Co.

“For a company to transfer that risk it would need proper wording in its D&O or a stand-alone reputational policy.”

James Sheehan, cyber risk practice leader, Integro Insurance Brokers

The St. Jude’s bear-raid “gives me pause,” said James Sheehan, cyber risk practice leader at Integro Insurance Brokers. “You would assume there was unauthorized access to the system. Was there exfiltration or manipulation of data?”

The bigger issue, according to Sheehan, is for the Securities & Exchange Commission.

“Was it insider trading, just at a different level? At the same time, insureds need to be thinking about all these threats. They need to be working with their brokers and carriers on how to value their virtual assets.”

In underwriting cyber coverage, two points of contention are the frequency of reporting and the treatment of prior acts. Insureds are disinclined to report frequent breaches, even though it is now widely understood that businesses are under constant attack.

“Noticing every possible attack doesn’t make sense for our clients or the insurers,” said Bridges. “We counsel clients to make decisions on reasonableness and materiality using our collective judgment as to the types of cyber incidents that should be reported.”

Coverage or exclusion of prior acts is a constant issue in cyber coverage. Big losses of data can be the result of trapdoors in the software put in place years prior to a hack being discovered.

“Historically cyber coverage was created out of errors and omissions coverage where retroactive dates made more sense,” said Bridges.

“The market now has adjusted to where you can get a year or two, maybe more.”

There is also the importance of appearance. “The challenge for business is the shift in optics from prevention to detection,” said Rosenzweig.

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“Organizations are constantly aware of intrusions, and they struggle with disclosure, especially if there has been no exfiltration of sensitive information. A lot of companies have stumbled. There is a hassle of reporting and a risk of failure to report.”

Rosenzweig is magnanimous about prior acts. “There has been a lot of improvement in coverage,” he said. “As long as there is no misrepresentation of knowledge of prior acts, some insurers are giving full coverage. Others are at least giving a look back of a few years.

“The complication is that you often don’t know about prior access until you are into the forensics.

“It is especially important for first-time buyers, and also in negotiating about prior acts. I would fight for coverage if an owner really did not have knowledge.” &

Gregory DL Morris is an independent business journalist based in New York with 25 years’ experience in industry, energy, finance and transportation. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

Cyber Resilience

No, Seriously. You Need a Comprehensive Cyber Incident Response Plan Before It’s Too Late.

Awareness of cyber risk is increasing, but some companies may be neglecting to prepare adequate response plans that could save them millions. 
By: | June 1, 2018 • 7 min read

To minimize the financial and reputational damage from a cyber attack, it is absolutely critical that businesses have a cyber incident response plan.

“Sadly, not all yet do,” said David Legassick, head of life sciences, tech and cyber, CNA Hardy.

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In the event of a breach, a company must be able to quickly identify and contain the problem, assess the level of impact, communicate internally and externally, recover where possible any lost data or functionality needed to resume business operations and act quickly to manage potential reputational risk.

This can only be achieved with help from the right external experts and the design and practice of a well-honed internal response.

The first step a company must take, said Legassick, is to understand its cyber exposures through asset identification, classification, risk assessment and protection measures, both technological and human.

According to Raf Sanchez, international breach response manager, Beazley, cyber-response plans should be flexible and applicable to a wide range of incidents, “not just a list of consecutive steps.”

They also should bring together key stakeholders and specify end goals.

Jason J. Hogg, CEO, Aon Cyber Solutions

With bad actors becoming increasingly sophisticated and often acting in groups, attack vectors can hit companies from multiple angles simultaneously, meaning a holistic approach is essential, agreed Jason J. Hogg, CEO, Aon Cyber Solutions.

“Collaboration is key — you have to take silos down and work in a cross-functional manner.”

This means assembling a response team including individuals from IT, legal, operations, risk management, HR, finance and the board — each of whom must be well drilled in their responsibilities in the event of a breach.

“You can’t pick your players on the day of the game,” said Hogg. “Response times are critical, so speed and timing are of the essence. You should also have a very clear communication plan to keep the CEO and board of directors informed of recommended courses of action and timing expectations.”

People on the incident response team must have sufficient technical skills and access to critical third parties to be able to make decisions and move to contain incidents fast. Knowledge of the company’s data and network topology is also key, said Legassick.

“Perhaps most important of all,” he added, “is to capture in detail how, when, where and why an incident occurred so there is a feedback loop that ensures each threat makes the cyber defense stronger.”

Cyber insurance can play a key role by providing a range of experts such as forensic analysts to help manage a cyber breach quickly and effectively (as well as PR and legal help). However, the learning process should begin before a breach occurs.

Practice Makes Perfect

“Any incident response plan is only as strong as the practice that goes into it,” explained Mike Peters, vice president, IT, RIMS — who also conducts stress testing through his firm Sentinel Cyber Defense Advisors.

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Unless companies have an ethical hacker or certified information security officer on board who can conduct sophisticated simulated attacks, Peters recommended they hire third-party experts to test their networks for weaknesses, remediate these issues and retest again for vulnerabilities that haven’t been patched or have newly appeared.

“You need to plan for every type of threat that’s out there,” he added.

Hogg agreed that bringing third parties in to conduct tests brings “fresh thinking, best practice and cross-pollination of learnings from testing plans across a multitude of industries and enterprises.”

“Collaboration is key — you have to take silos down and work in a cross-functional manner.” — Jason J. Hogg, CEO, Aon Cyber Solutions

Legassick added that companies should test their plans at least annually, updating procedures whenever there is a significant change in business activity, technology or location.

“As companies expand, cyber security is not always front of mind, but new operations and territories all expose a company to new risks.”

For smaller companies that might not have the resources or the expertise to develop an internal cyber response plan from whole cloth, some carriers offer their own cyber risk resources online.

Evan Fenaroli, an underwriting product manager with the Philadelphia Insurance Companies (PHLY), said his company hosts an eRiskHub, which gives PHLY clients a place to start looking for cyber event response answers.

That includes access to a pool of attorneys who can guide company executives in creating a plan.

“It’s something at the highest level that needs to be a priority,” Fenaroli said. For those just getting started, Fenaroli provided a checklist for consideration:

  • Purchase cyber insurance, read the policy and understand its notice requirements.
  • Work with an attorney to develop a cyber event response plan that you can customize to your business.
  • Identify stakeholders within the company who will own the plan and its execution.
  • Find outside forensics experts that the company can call in an emergency.
  • Identify a public relations expert who can be called in the case of an event that could be leaked to the press or otherwise become newsworthy.

“When all of these things fall into place, the outcome is far better in that there isn’t a panic,” said Fenaroli, who, like others, recommends the plan be tested at least annually.

Cyber’s Physical Threat

With the digital and physical worlds converging due to the rise of the Internet of Things, Hogg reminded companies: “You can’t just test in the virtual world — testing physical end-point security is critical too.”

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How that testing is communicated to underwriters should also be a key focus, said Rich DePiero, head of cyber, North America, Swiss Re Corporate Solutions.

Don’t just report on what went well; it’s far more believable for an underwriter to hear what didn’t go well, he said.

“If I hear a client say it is perfect and then I look at some of the results of the responses to breaches last year, there is a disconnect. Help us understand what you learned and what you worked out. You want things to fail during these incident response tests, because that is how we learn,” he explained.

“Bringing in these outside firms, detailing what they learned and defining roles and responsibilities in the event of an incident is really the best practice, and we are seeing more and more companies do that.”

Support from the Board

Good cyber protection is built around a combination of process, technology, learning and people. While not every cyber incident needs to be reported to the boardroom, senior management has a key role in creating a culture of planning and risk awareness.

David Legassick, head of life sciences, tech and cyber, CNA Hardy

“Cyber is a boardroom risk. If it is not taken seriously at boardroom level, you are more than likely to suffer a network breach,” Legassick said.

However, getting board buy-in or buy-in from the C-suite is not always easy.

“C-suite executives often put off testing crisis plans as they get in the way of the day job. The irony here is obvious given how disruptive an incident can be,” said Sanchez.

“The C-suite must demonstrate its support for incident response planning and that it expects staff at all levels of the organization to play their part in recovering from serious incidents.”

“What these people need from the board is support,” said Jill Salmon, New York-based vice president, head of cyber/tech/MPL, Berkshire Hathaway Specialty Insurance.

“I don’t know that the information security folks are looking for direction from the board as much as they are looking for support from a resources standpoint and a visibility standpoint.

“They’ve got to be aware of what they need and they need to have the money to be able to build it up to that level,” she said.

Without that support, according to Legassick, failure to empower and encourage the IT team to manage cyber threats holistically through integration with the rest of the organization, particularly risk managers, becomes a common mistake.

He also warned that “blame culture” can prevent staff from escalating problems to management in a timely manner.

Collaboration and Communication

Given that cyber incident response truly is a team effort, it is therefore essential that a culture of collaboration, preparation and practice is embedded from the top down.

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One of the biggest tripping points for companies — and an area that has done the most damage from a reputational perspective — is in how quickly and effectively the company communicates to the public in the aftermath of a cyber event.

Salmon said of all the cyber incident response plans she has seen, the companies that have impressed her most are those that have written mock press releases and rehearsed how they are going to respond to the media in the aftermath of an event.

“We have seen so many companies trip up in that regard,” she said. “There have been examples of companies taking too long and then not explaining why it took them so long. It’s like any other crisis — the way that you are communicating it to the public is really important.” &

Antony Ireland is a London-based financial journalist. He can be reached at [email protected] Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]