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

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R&I Profile

Achieving Balance

XL Catlin’s Denise Balan stays calm and focused when faced with crisis.
By: | January 10, 2018 • 6 min read

In the high-stress scenario of kidnap or ransom, the first image that comes to mind isn’t necessarily a yoga mat — at least, not for most.

But Denise Balan, senior VP and head of U.S. kidnap & ransom, XL Catlin, who practices yoga every day, would swear by it.

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“I looked at these opposing aspects of my life,” she said. “Yoga is about focus, balance, clarity of intent. In a moment of stress, how do you respond? The more clarity and calmness you maintain, the better positioned you are to provide assistance in moments of crisis.

“Nobody wants to be speaking to a frenetic person when either dealing with a dangerous situation or planning for prevention of a situation,” she added.

“There’s a poem by [Rudyard] Kipling on that,” added Balan’s colleague Ben Tucker. “What it boils down to is: If you can remain calm, you can manage through a crisis a lot better.”

Tucker, who works side by side with Balan as head of U.S. terrorism and political violence, XL Catlin, has seen how yoga influences his colleague.

“The way Denise interacts with stakeholders in this process — she is very professional and calm in the approach she takes.”

Yin and Yang

Sometimes seemingly opposite or contrary forces may actually be complementary and interconnected. In Balan’s life, yoga and K&R have become her yin and yang.

She entered the insurance world after earning a juris doctor degree and practicing law for a few years. The switch came, she said, when Balan realized she wasn’t enjoying her time as a commercial litigator.

Denise Balan, senior VP and head of U.S. kidnap & ransom, XL Catlin

In her new role, she was able to use her legal background to manage litigation at AIG, where her transition from law to insurance took place. She started her insurance career in the environmental sector.

In a chance meeting in 2007, Balan met with crisis management underwriters who told her about kidnap and ransom products.

She was hooked.

Because of her background in yoga, Balan liked the crisis management side of the job. Being able to bring the calmness and clearness of intent she practiced during yoga into assisting clients in planning for crisis management piqued her interest.

She then joined XL Catlin in July 2013, where she built the K&R team.

As she became more immersed in her field, Balan began to notice something: The principles she learned in yoga were the same principles ex-military and ex-law enforcement practiced when called to a K&R-related crisis.

She said, “They have a warrior mentality — focus, purpose, strength and logic — and I would say yoga is quite similar in discipline.”

“K&R responders have a warrior mentality — focus, purpose, strength and logic — and I would say yoga is quite similar in discipline.” — Denise Balan, senior VP and head of U.S. kidnap & ransom, XL Catlin

Many understand yoga to be, in itself, one type of meditation, but yoga actually encompasses a group of physical, mental and spiritual practices. Each is a discipline. Some forms of yoga focus on movement and breathing, others focus on posture and technique. Some yoga is meant to relax the mind and create a sense of calmness; other yoga types make participants sweat.

After having her second child and working full-time, Balan wanted to find something physical and relaxing for herself; a friend suggested yoga. During her first lesson, Balan said she was enamored with it.

“I felt like I’d done it all my life.”

She dove into the philosophy of yoga, adopting the practice into her daily routine. Every morning, whether Balan is in her Long Island home or on a business trip, she pulls out her yoga mat to practice.

“I always travel with my mat,” she said. “Daily practice is the simplest form of connection to routine to maintain my balance — physically and mentally.”

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She said the strangest place she has ever practiced was in Lisbon. She was on a very narrow balcony with a bird feeder swarming with sparrows overhead.

After years of studying and practicing, Balan is considered a yogi — someone who is highly proficient in yoga. She attends annual retreats with her yoga group, where she is able to rejuvenate, ready to tackle any K&R event when she returns.

In 2016, Balan visited Tuscany, Italy, where she learned the practice of yoga nidra, a very deep form of meditation. It’s described as the “going-to-sleep stage” — a type of yoga that brings participants to a state of consciousness between waking and sleeping.

“It awakens a different part of your brain,” Balan commented. “Orally describing it doesn’t quite do it justice. One has to practice Nidra to fully understand the effect it has on your being.”

Keeping a level head during a crisis is key in their line of business, Tucker said. He can attest to the benefit of having a yogi on board.

“I’ve seen her run table-top exercises where there is this group of people in a room and they run an exercise, a simulation of a kidnap incident. Denise is very committed to what we’re doing,” said Tucker.

“She brings that energy. She doesn’t get flustered by much.”

Building a K&R Program

When Balan joined XL Catlin, she was tasked with creating the K&R team.

Balan during a retreat in Sicily, Italy, 2017

She spent time researching and analyzing what clients would want in their K&R coverage. What stuck out most to Balan was the fact that, in these situations, the decision to purchase kidnap and ransom cover is rarely made because of desire for reimbursement of money.

“I asked why people buy this type of coverage. The answer was for the security responders,” she said.

“These are the people who sit with the family. They’re similar to psychologists or priests,” Balan further explained. “Corporations can afford to pay ransom. They buy [K&R] because it gives them access to these trained and dedicated professionals who not only provide negotiation advice, but actually sit with a victim’s family, engaging deep levels of emotional investment.”

“I’ve learned to appreciate all moments in life — one at a time. The ability to think clearly and calmly guides my work, my practice and my personal life.” — Denise Balan, senior VP and head of U.S. kidnap & ransom, XL Catlin

Balan described these responders as people having total clarity of purpose, setting their intentions to resolve a crisis — a practice at the very heart of yoga. She knew XL Catlin’s new kidnap program would put stock in their responders.

“I’ve worked closely with the responders to better understand what they can do for our clientele. These are the people who run into danger — warrior hearts married to dedication to our clients’ best interests.”

But K&R is more than fast-paced crisis and quick thinking; Balan also spent a good deal of time writing the K&R form and getting the company’s resources in order. This was a huge task to tackle when creating the program from the ground up.

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“A lot of my day-to-day is speaking with brokers and finding ways to enhance our product,” she said.

After a few months, she was able to hire the company’s first K&R underwriter. From there, the program has grown. It’s left her feeling professionally rewarded.

“People don’t often get that opportunity to build something up from scratch,” she said. “It’s been an amazing experience — rewarding and fun.”

“She brings groups of people together,” said Tucker. “She’s created a positive environment.”

Balan’s yogi nature extends beyond the office walls, too. Her pride and joy, she said, are her kids. And while it may seem like two large parts of her life are opposite in nature, Balan’s achieved balance through her passions.

“[Yoga] has given me the ability to see beyond only one aspect of any situation” she said. “I’ve learned to appreciate all moments in life — one at a time. The ability to think clearly and calmly guides my work, my practice and my personal life.” &

Autumn Heisler is a staff writer at Risk & Insurance. She can be reached at [email protected]