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

Black Swan: Cloud Attack

Breaking Clouds

A combination of physical and cyber attacks on multiple data centers for cloud service providers causes economic havoc. Even the most well-prepared companies are thrown into paralyzing coverage confusion.
By: | July 27, 2017 • 10 min read

Scenario

By month 16 of the new presidential administration, the Sunshine Brigade is more than ready to act.

Stoked by their anger over rampant economic inequality, the mostly college-educated group of what might best be called upper-middle-class anarchists — many of them from California, Oregon and Washington State — put in motion the gears of a plan more than two years in the making.

Their logic, to them at least, is unimpeachable. Continued consolidation of economic power into the hands of fewer and fewer corporations is creating a world where the rich increasingly exploit and shut out the poor.

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The rise of the techno giants is accelerating this trend, according to the Sunshine Brigade’s de facto leader Emily Brookes, an All-American rugby player and a graduate of Reed College in Oregon.

With a new presidential administration seemingly bent on increasing the economic advantages of the rich with no end in sight, nothing to do then but break things up; and in so doing break the hold of this technology oligarchy.

As Emily Brookes so forcefully put in her instant messages to the other members of the brigade: Break the Cloud.

With more than 500 members, many of them with ample financial and technical resources, the Sunshine Brigade is very capable of delivering on its plan for a two-pronged attack.

It is also radicalized enough to justify the loss of some human life, even its own countrymen, to “save” — in its collective logic — the tens of millions of global citizens that are living as virtual slaves in this callous, exploitative global economy.

With websites and digitally connected services large and small down for days, irritation turns to fear.

The first wave in the attack is an attempt to infect and shut down the data centers for the top three cloud service providers. It takes months to set up this offensive.

Rather than rely on a phishing scam from outside the firewalls of the service providers, The Sunshine Brigade uses its social and business connections to place three members on each of the cloud provider’s payrolls. An infected link from someone you know, someone in the cubicle right next to you, seems like an unstoppable play.

It only partially works. Only one of the cloud service providers is harmed when an unsuspecting employee clicks on a link from their traitorous co-worker. The released malware manages to cripple a major cloud service provider for 12 hours.

With millions of users affected, the act creates substantial disruption and garners global headlines. Insured losses are around $1.5 billion. But this is just the beginning.

The morning after, the Sunshine Brigade unleashes a far more devastating and far more ruthless Round Two.

Using self-driving trucks, the Sunshine Brigade smashes into five data centers; three on the West Coast, and two in the Midwest. Fourteen employees of those cloud servers are killed and another 23 injured; some of them critically.

This time the Brigade gets what it wanted. The physical damage to the data centers is substantial enough that it significantly affects three of the top four cloud service providers for five days.

With websites and digitally connected services large and small down for days, irritation turns to fear.

Small and mid-sized banks, which host their applications on clouds, are shut down. Small business owners and consumer banking customers immediately feel the brunt. Retailers that depend on clouds to host their inventory and transaction information are also hit hard.

But really, the blow falls everywhere.

In the U.S., transportation, financial, health, government and other crucial services grind to a halt in many cases.

Not everyone is disrupted. Some of the larger corporations are sophisticated enough in their risk management, those that used back-up clouds and had steadfast business resiliency plans suffer minimal disruption.

Many small to mid-size companies, though, cannot operate. Their employees can’t get to work and when they can, they sit idly in front of blank computer screens connected to useless servers.

For the man on the street, this is hell.

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Long lines blossom at the likes of gas stations, banks and grocery stores. A population already on edge from a steady diet of social media provocation becomes even more inflamed.

By nightfall of Day Five, the three major cloud service providers are recovered, and digital “normalcy” begins to creep back. But for many small and medium-sized businesses, the recovery comes way too late.

Economic losses promise to register in the tens of billions. It’s not being too imaginative to think that losses could hit the $100 billion mark.

Two multinational insurers based in the U.S., three Lloyd’s syndicates and a Bermuda insurer signal to regulators that their aggregate cyber-related losses are so great that they will most likely become insolvent.

Emily Brookes and her cohorts were willing to kill more than a dozen people to promote their worldview. In their youthful naiveté, they could not know just how much suffering they would cause.

Observations

For some commercial insurance carriers, the aggregated losses from a prolonged disruption of cloud computing services could be catastrophic, or close to it.

“It’s on a par with any earthquake or hurricane or tornado,” said Scott Stransky, an associate vice president and principal scientist with the modeling firm AIR Worldwide.

AIR modeled the insured losses for the Fortune 1,000 were Amazon’s cloud service to go down for one day. They came up with a figure of $3 billion.

Now consider that most businesses in this country are small businesses, with not nearly the risk management sophistication of the Fortune 1000. Then consider a cloud interruption of five days or more.

Mark Greisiger, president, NetDiligence

“Almost any company you talk about today would rely to some extent on the cloud, either to host their website, to do invoicing, inventory, you name it — the cloud is being used across the board,” Stransky said.

“It’s a significant issue for insurers and one we think about a lot,” said Nick Economidis, an underwriter with specialty carrier Beazley.

“Should a cloud service provider go down, everybody who is working with that cloud service provider is impacted by that,” he said.

“Now, pretty much every software maker is on the cloud,” said Mark Greisiger, president of NetDiligence.

“In the old days, someone would come in and install software on your servers and come in annually for maintenance. That’s all gone bye-bye. Everybody who makes software is forcing you onto their private cloud,” Greisiger said.

The aggregation risk for carriers is complicated by the degree of transparency they have into which insured’s applications are hosted on which cloud provider.

Now here’s the even trickier part. Clouds outsource to other clouds.

“It’s almost becoming a spider’s web of interdependencies on who has access to what in terms of upstream and downstream providers,” Greisiger said.

Determining which of their insureds is hosted on which cloud, and in turn, where that cloud is outsourcing to other clouds can be very difficult for carriers to determine.

Even if a company is careful to diversify the risks they’re taking, they might not realize that a high percentage of insureds are even with the same cloud provider. They could be hit with devastating losses across their entire portfolio of business, said an executive with BDO consulting.

AIR’s Stransky said his company launched a product in April, ARC, which stands for Analytics of Risk from Cyber, which is designed to help carriers gain that much needed transparency.

Among insureds, surviving an event of this magnitude will depend not only on the sophistication of their risk management department, but on the company’s overall ability to negotiate contracts with vendors and suppliers that will indemnify the company in the case of a cloud outage of this duration.

It will also depend on organization’s understanding that there is no off-the-shelf solution that will prevent an event like this or make a company whole after it.

Shiraz Saeed, national practice leader, cyber, Starr Companies

Experts say contracts with cloud service providers, customers and suppliers must be structured so that a company is defended should it lose cloud access for as much as five days or more.

Best practices also include modeling just what your losses would look like in this area, and vetting your full portfolio of insurance policies to understand how each would respond.

One broker said buyers can’t be blamed if the complexities of the coverage issues at stake here are initially hard to grasp.

“It’s becoming a spider’s web of interdependencies on who has access to what.” —Mark Greisiger, president, NetDiligence

“I think it’s the broker’s job to inform the client of this exposure,” said Doug Friel, a vice president with JKJ Commercial Insurance, based in Newtown, Pa.

“You may have business interruption coverage for direct physical damage to your building. But have you ever thought about your business income if your IT structure goes down?” Friel said.

He said many buyers might not realize there is a difference.

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Large businesses should have the resources to demand from their cloud service providers that they be indemnified for the entirety of a cloud failure event. There will be a fee for that, but it will be well worth paying, Friel said.

“You have to push,” Friel said. “They are going to say, ‘Here is our standard contract, sign it.’ ”

Don’t settle for that, he said, although many do in ignorance, he added.

“Where possible, we would look for clients to negotiate their contracts. These business relationships should be mutually beneficial, even if one of these events occur,” said Shiraz Saeed, national practice leader, cyber, for the Starr Companies.

It’s a partnership, he said.

“It shouldn’t be a zero sum game on either side. I think there should be an understanding of what the potential loss might be and then designing a contract around that,” he said.

While cloud service providers are known for having high grade security systems, most average organizations don’t have the means for that. But no matter what a company’s resources, the first step is modeling where your digital assets are, and what you and your customers stand to lose if you lose access to them.

“Most insureds don’t seem to understand the amount of individual loss that you could be subject to,” said Jim Evans, leader of insurance advisory services at BDO Consulting. “Usually this stuff is measured in hours,” he said. “But what if a cloud provider is out for three or four days?” he said.

“Trying to quantify what you did lose in an event is hard enough. Trying to do a modeling exercise about what you could lose? It’s something that just doesn’t get done enough,” he said.

Once you have an understanding of what you own and what you stand to lose, the next step is prioritizing the protection of the assets you have. That means drilling into your contract with your cloud service providers to get the maximum indemnification.

It also means spreading your risk so that if at all possible, not all of your assets or your customers’ assets are housed by one cloud service provider. Cloud platforms can be public, private, or a hybrid of the two.

Understanding where your assets are in that architecture is crucial. Spending the money to insure that they are protected behind a diverse menu of firewalls is highly advisable.

Navigating the different iterations of business interruption coverage in property, cyber and kidnap and ransom policies is also important.

Make sure your broker can provide clarity on the different types of coverages and tailor them to your needs, experts said.

The concept of design thinking is really what’s in play here. Organizations have to work with vendors in every aspect of their operations to design a risk management system that can sustain this kind of hit.

“Build a better mousetrap to protect yourself,” said JKJ’s Friel.

“Depending on your service, you need to have the best and the brightest designing this stuff. Spread the risk.”

“Don’t be afraid to ask for more,” he said.

Postscript

In engineering an attack on the cloud, Emily Brookes and her cohorts accomplished the opposite of what they set out to do.

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Only the largest corporations with the most sophisticated risk management programs were able to survive the attempt to break the cloud with manageable losses.

Small businesses, the true backbone of the U.S. economy, suffered terribly. Entrepreneurs who put their life’s work into their business lost it in many cases.

Those on the lowest part of the economic scale, the working poor, lost their jobs and their ability to cover their rent and grocery bills. They joined the ranks of those subsidized by the government by the millions.  The attempt to break the cloud resulted in an even more polarized society. &

Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at [email protected]