Cyber Business Interruption Coverage Is Anything But Simple. 5 Key Things to Keep in Mind

By: Stephanie Snyder Frenier | December 1, 2022

Stephanie Snyder Frenier is SVP with CAC Specialty’s Professional & Cyber Solutions practice. Stephanie has over 18 years of experience engaging with clients and prospects to develop tailor-made cyber and technology errors & omissions risk transfer solutions, while also supporting marketing and sales strategy.

Topics: Cyber Risks | Risk Insider

There is a lot of talk in the cyber insurance industry over the challenge of systemic risk, and many carriers have announced their intentions to address these exposures with new policy language.

However, most carriers have already taken action to address certain elements of aggregated risk via limitations to the scope of cyber business interruption (BI) coverage.

BI is the most challenging part of cyber underwriting, as it requires understanding of an insured’s resilience to a cyberattack, including incident response, business continuity, disaster recovery, as well as dependencies within the IT and non-IT supply chain.

There is a significant amount of variation in the cyber BI coverage offering across the market. Here are five BI coverage elements to consider when purchasing cyber insurance:

1) Waiting Period Length

Prior to the hard market, waiting periods may have been as low as 8 to 10 hours for most insureds, whereas with the hard market conditions of 2021, some carriers began pressing for waiting periods of 24 hours or more.

The market standard is 12 hours, which is generally available in today’s moderating market.

2) Waiting Period Applicability

It is important to consider how the waiting period works.

Many carriers use the waiting period as a “qualifying period” for coverage, and once the business disruption meets the length of time of the waiting period, coverage is triggered and then the dollar retention is then applied back to minute one of loss.

Other carriers use the waiting period as a retention in terms of the amount of loss incurred during the duration of the waiting period.

In this instance carriers tend apply the “greater of” the amount of dollar loss due to a business interruption during the waiting period or the dollar retention amount — whichever is greater.

3) Period of Indemnity

This is the period for which the carrier will indemnify for a business interruption, as defined, and can vary from as short as 90 days to as long as 180 days.

Typically, this considers extra expenses incurred by the insured during the business interruption as well as any associated income loss.

In some policies, and extended period of indemnity may be available to consider the continued income loss arising from the business interruption.

4) Dependent Business Interruption

Carriers continue to be concerned about the scope of dependent business interruption (DBI) coverage and are working to clarify what constitutes a “dependent business.”

Dependent businesses typically include IT services providers (including cloud service providers) on which the insured is dependent to run their computer networks.

During the pre-2020 soft cyber insurance market, coverage was available for non-IT providers as well, however this has been largely eliminated given the potential for loss and lack of optics from an underwriting standpoint into the insured’s supply chain.

Additionally, carriers are seeking to define dependent businesses only as those under contract with the insured.

5) Sublimits

One way that carriers are protecting themselves from loss aggregation relative to business interruption is by applying sublimits.

While full limits are typically available for DBI coverage related to a security failure, many carriers continue to apply sublimits for DBI related to systems failure (a technology outage not due to a breach).

However, the challenge with sublimits is with regards to any excess placements, in terms of ensuring that excess carriers follow the sublimit within their layer, and if not, recognize erosion of the underlying limit.

As the cyber insurance market continues to work to clarify coverage for systemic risk, buyers should expect the above coverage elements to be revisited by carriers.

The job of a good broker is to help buyers understand the nuances of cyber coverage and ensure that the terms of the policy make sense relative to the operations of the business, and other lines of coverage that may apply (such as property).

The more information that buyers can include as a part of the submission, the easier it is for underwriters to understand business interruption exposures and offer better coverage terms. &

Vermont’s Future Is Golden

Challenging market conditions are driving insureds to captives. Vermont offers a reliable domicile.

By: State of Vermont | November 21, 2024

Hard markets in commercial insurance lines have been a problem for years now. Many lines don’t show signs of softening, though some, like cyber, have ebbed over the past few years.

High claims volumes and costs have caused carriers to tighten terms and conditions, introduce new exclusions and increase premiums. A variety of different risks are included in this market tightening, and it’s affecting both public and private companies.

As Sandy Bigglestone, deputy commissioner for the State of Vermont’s captive insurance division, explained, schools, churches and other nonprofits are contending carriers are “excluding sexual abuse and molestation from coverage for a lot of these types of entities. These organizations understand the risk and the public needs to have confidence the organizations are addressing the risks, so they must have the coverage.”

Though many commercial lines are affected, property has perhaps been hit the hardest. Increased claims, inaccurate property valuations and other challenges have caused insurers to tighten their books in recent years. 2024’s spate of hurricanes will likely make matters worse.

“There continues to be challenges in the commercial market,” Bigglestone said. “Some companies are coming to us with risks that they say they’ve been self-insuring on their balance sheet, and why not transfer that to a captive to receive greater benefits?”

Consistency and Stability

Sandy Bigglestone, Deputy Commissioner for the State of Vermont’s Captive Insurance Division

With the commercial insurance market so unstable, companies are turning to captives to house their exposures. Vermont, a long-time domicile, is getting increased attention because of their strong reputation and their leadership as the top domicile worldwide.

“All stakeholders enjoy the stable political and regulatory environment Vermont has to offer to operate in,” Bigglestone said.

Of course, a lot of consideration goes into deciding whether or not a captive is the right choice for a particular company. Businesses need to assess their exposures and their books to make sure they can adequately operate a captive.

There are significant advantages, however. “For low frequency, high severity risks, captives can access the reinsurance markets directly, so it’s very attractive for businesses to put a captive in place,” Bigglestone said.

And carriers are more accepting of captives as part of a broader insurance program.

“Captives are changing the relationship businesses have with commercial carriers,” Bigglestone said. “Commercial carriers are wanting to see companies with skin in the game; therefore, the relationships have evolved to be less transactional and more strategic.”

Balancing Bureaucracy

With 76 global domiciles, companies have a lot of options when it comes to selecting a captive partner. “Captive insurance domiciles compete globally for the business,” Bigglestone said. “If you were to put all 7,000-plus captive insurance companies around the world, all in New York, it wouldn’t have the same economic impact as 700 captives in Vermont does. The captive insurance industry is very important to our state and we will continue to support it in any way we can.”

Businesses should look for domiciles that balance a need for quality regulations with a process that isn’t overly bureaucratic and is seamless for business owners to navigate.

“Companies are attracted to an environment with quality regulatory standards and a stable regulatory environment,” Bigglestone said. “Vermont sets the regulatory standard in terms of financial analysis and examinations.”

In addition to quality regulations, firms will want to seek out a domicile that is agile enough to license captive insurance companies that fit their unique needs. It is important that a domicile have firm but fair regulation and the experience to consider new ideas and implement them. Companies must consider a variety of factors when choosing a domicile and not everyone will be the right fit for every company.

“You have to consider the captive owner and the industry sector that that owner operates in, as well as the insurance risks that are going into the captive program,” Bigglestone said. “Captive laws and regulations have to have a reasonable degree of flexibility to accommodate all the varying needs of owners and then impose rules based on the merits of each captive program.”

She added that creativity is a critical part of the process: “The ability to vet concepts and ideas with trusted individuals is key to having quality standards,” Bigglestone said. “And it can make captives appealing to insureds who are tired of commercial carriers not meeting the needs of the business, and who desire more control over their insurance programs.”

“When you think about the commercial marketplace, commercial insurers are supposed to operate in each jurisdiction in a competitive manner. Commercial carriers often look the same. They sell auto coverage to anyone with a driver’s license. The rules and regulations imposed upon commercial insurance companies are designed to be more formulaic for that reason,” Bigglestone said.

“Uniform regulatory standards apply to commercial carriers for the protection of the policyholders. These are standards all insurance regulators focus on, and standards captive insurance regulators need to understand, but with a specialized focus.”

A Quality Domicile Built for the Future

A combination of experience, regulatory standards and talent make Vermont a top domicile for companies looking to form a captive. The longevity of licensing captive insurance companies for over forty years is a testament to the quality work they’ve provided in the past and will continue to provide for many years to come.

Vermont’s reputation has helped the state attract and retain top captive talent, ensuring the businesses it serves are in good hands. The state has 32 employees dedicated to captives, and their average employee retention is 15 years. The Vermont Captive Insurance Association, the largest captive insurance trade organization, also helps companies connect with professional services needed to make their captive successful.

“There’s a whole host of service providers with proven expertise right here in Vermont,” Bigglestone said.

Taken together, Vermont’s resources, expertise and talent make it a prime domicile. They’ve been on a growth trajectory over the last few years and that’s unlikely to change anytime soon. Companies can trust their captive will be in good hands when they choose Vermont.

“Vermont has always competed on quality,” Bigglestone said. “We do have a mission and that hasn’t changed in over 40 years. It’s to maintain a system, or domicile that attracts quality business to Vermont, to promote our reputation in the industry, and to uphold a regulatory framework to protect the solvency of the companies that choose to place their business here.”

To learn more, visit: www.vermontcaptive.com

This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with State of Vermont. The editorial staff of Risk & Insurance had no role in its preparation.

The State of Vermont, known as the “Gold Standard” of captive domiciles, is the leading onshore captive insurance domicile, with over 1,200 licensed captive insurance companies, including 48 of the Fortune 100 and 18 of the companies that make up the Dow 30.