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Cyber Risk Is Evolving. How Will Coverage Keep Pace?

As the cyber risk evolution continues, coverage gaps will only grow without innovative solutions.
By: | May 2, 2018 • 6 min read

Cyber risk is never the same two days in a row.

Interconnected technology, sophisticated hackers and the speed of new attacks make cyber security an ongoing and exhausting challenge. The various types of breaches — denial of service, ransomware, social engineering and outright theft of private data, among others — infiltrate systems in different ways and make it difficult for risk managers to determine whether or where they have coverage.

Traditional cyber policies primarily cover network security and privacy breaches. After a handful of high-profile security incidences, many companies have grown familiar with the consequences of such a breach, including notification, forensic investigation, credit monitoring and system security enhancement expenses.

“Cyber risk is evolving so quickly that it’s difficult to adjust and build new solutions to keep pace,” said Tim Nunziata, director and division head of Commercial E&O/Cyber, Management Liability and Specialty at Nationwide. “We are often still resolving issues from a previous attack, implementing security patches and shoring up vulnerabilities, while bad actors are already on to something new. As cyber threats take on new forms, companies may find themselves bearing related expenses not covered under any of their insurance policies.”

Addressing coverage gaps will take a concerted effort to improve network defenses, broaden cyber policies and better align them with other products.

“We are now seeing a more organized approach to cyber risk to address all potential causes of system failure,” Nunziata said.

Evolving Risks Create Coverage Gaps

Tim Nunziata, Director and Division Head of Commercial E&O/Cyber, Management Liability and Specialty

Exposures now include other forms of technology failure that could incur business interruption and property losses not typically covered by stand-alone cyber policies. Overlap with other policies or the presence of “silent” cyber coverage (non-traditional sources of cyber exposure coverage found in property and liability insurance policies by virtue of policy wording not implicitly including or excluding cyber risks) may yield some indemnification, but gaps and gray areas abound.

System failure can come in many forms and result in varied consequences depending on the type of business. Global attacks like WannaCry and NotPetya may grab headlines, but a far more common — and commonly overlooked — cyber threat is accidental system failure triggered by a negligent employee.

“I’m talking about the worker who trips over a cord in the hallway, accidentally unplugs something, or pushes the wrong button and inadvertently shuts the whole network down,” Nunziata said. “If the problem is not identified and resolved quickly, there will be a business interruption impact and it could affect the business of third parties as well.”

A typical cyber policy may respond if the incident potentially exposes confidential information, but it may not pick up extra expenses associated with business interruption. An E&O policy, however, could potentially respond if it includes coverage for employee negligence.

Similar overlaps occur between cyber and crime policies in the case of social engineering scams, which involve no network breach but amount to a theft via network channels.

“If there has been no unauthorized access to your system and an employee is tricked into willingly transferring funds, that may not be a cyber claim,” Nunziata said. “But a crime or a professional liability policy could come into play.”

Interplay between cyber and physical property exposures presents similar challenges.

“If a refrigerated truck is carrying a load of produce and someone hacks into the main system and raises the temperature in the truck by five degrees, causing everything to spoil, is that a property claim or a cyber claim?” Nunziata said. “There are many areas where overlap with other exposures creates risks that are not covered by a standard cyber policy.”

As the risk continues to evolve, coverage gaps will only grow without innovative solutions. Two coverage strategies are emerging as options to bridge those gaps.

Extending Coverage Up and Out to Fill the Gaps

Broadening language in existing cyber policies can bring business interruption and other expenses related to system failure — regardless of the cause — under the umbrella of affirmative cyber insurance. In other words, the focus is on building up the cyber vertical, rather than spreading it outward.

“Existing cyber products can be extended or amended to include those E&O exposures, broader system failure, business interruption, contingent business interruption,” Nunziata said. “These will become standard extensions on many network security and privacy policies over the next few years.”

But as cyber risk seeps into every facet of a business’s operations and overlaps with more traditional property/casualty exposures, the most robust defense may be tacking affirmative cyber coverage onto those traditional policies.

“Cyber coverage is its own vertical, but the market is starting to realize that coverage can also potentially run horizontally throughout,” Nunziata said. “In the past we were trying to find answers within the cyber policy, but I think the answer is going to be pushing cyber extensions into other property/casualty coverages. That presents the best way to underwrite specifically to the wide varying types of cyber risks, charge appropriate premium and clarify language, so there are better opportunities to seal gaps and eliminate overlaps.”

Cyber endorsements and insuring agreements could introduce affirmative cyber coverage to professional liability, property, crime and even personal lines policies. This would go a long way towards reducing the guesswork around the root cause of a system failure and how to classify the resulting losses for coverage purposes.

Those other products, however, have the benefit of multi-decade claims histories and court precedents that have helped to standardize language, or at least create precedent regarding, contract interpretation.

This is where the enforcement of new data protection and network security standards may help.

New rules, including Europe’s General Data Protection Regulation (“GDPR”) and the New York Department of Financial Services’ cybersecurity regulations, represent a first step toward a more holistic approach to combatting cyber risk, as they will aid organizations and insurers in gathering information around cyber incidents consistently and on a broader scale. They will also raise risk management standards and hold companies accountable for protecting their networks and data.

“These regulations will require clients to be prepared, and the first step of preparation is gathering information. The more information we can collect, the better products we can build,” Nunziata said.

A Long-Term Approach Built to Evolve with the Risk

No matter how ironclad a company’s network defenses may be and no matter how well-versed they are in breach response, the ever-evolving nature of the risk means a debilitating cyber incident is not a question of if, but when. Even the best risk management cannot supply clear, comprehensive coverage.

“Despite this fact, overcoming a cyber breach is possible,” said Nunziata. “There are solutions, and we work with clients to craft what they need.”

“Our cyber underwriters are partnering with other divisions within Nationwide to push affirmative coverage out to more traditional commercial policies, leveraging our multiline expertise across products. We’re looking to build out existing products through innovative structures, endorsements and new insuring agreements.”

A strategy of gradual and consistent growth within the cyber market has enabled the carrier to closely track and respond to evolving exposure thoughtfully, without rapidly raising rates or tightening terms and conditions.

“We’re going to dictate our strategy around the problem. We’ve seen markets come and go over the last five or six years, but our approach has not changed. It’s expanded and grown, but it’s been consistent,” Nunziata said.

To learn about Nationwide’s Cyber and Professional Liability services visit https://mls.nationwideexcessandsurplus.com/fs/products/cyber-and-professional-liability/ or contact Tim Nunziata, director, at 212-329-6915 or [email protected].

Speak with your agent about specific policy details and coverages. Consult your policy’s terms and conditions for specific coverage information.

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




Nationwide, a Fortune 100 company, is one of the largest and strongest diversified insurance and financial services organizations in the U.S. and is rated A+ by both A.M. Best and Standard & Poor’s.

Exclusive | Hank Greenberg on China Trade, Starr’s Rapid Growth and 100th, Spitzer, Schneiderman and More

In a robust and frank conversation, the insurance legend provides unique insights into global trade, his past battles and what the future holds for the industry and his company.
By: | October 12, 2018 • 12 min read

In 1960, Maurice “Hank” Greenberg was hired as a vice president of C.V. Starr & Co. At age 35, he had already accomplished a great deal.

He served his country as part of the Allied Forces that stormed the beaches at Normandy and liberated the Nazi death camps. He fought again during the Korean War, earning a Bronze Star. He held a law degree from New York Law School.

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Now he was ready to make his mark on the business world.

Even C.V. Starr himself — who hired Mr. Greenberg and later hand-picked him as the successor to the company he founded in Shanghai in 1919 — could not have imagined what a mark it would be.

Mr. Greenberg began to build AIG as a Starr subsidiary, then in 1969, he took it public. The company would, at its peak, achieve a market cap of some $180 billion and cement its place as the largest insurance and financial services company in history.

This month, Mr. Greenberg travels to China to celebrate the 100th anniversary of C.V. Starr & Co. That visit occurs at a prickly time in U.S.-Sino relations, as the Trump administration levies tariffs on hundreds of billions of dollars in Chinese goods and China retaliates.

In September, Risk & Insurance® sat down with Mr. Greenberg in his Park Avenue office to hear his thoughts on the centennial of C.V. Starr, the dynamics of U.S. trade relationships with China and the future of the U.S. insurance industry as it faces the challenges of technology development and talent recruitment and retention, among many others. What follows is an edited transcript of that discussion.


R&I: One hundred years is quite an impressive milestone for any company. Celebrating the anniversary in China signifies the importance and longevity of that relationship. Can you tell us more about C.V. Starr’s history with China?

Hank Greenberg: We have a long history in China. I first went there in 1975. There was little there, but I had business throughout Asia, and I stopped there all the time. I’d stop there a couple of times a year and build relationships.

When I first started visiting China, there was only one state-owned insurance company there, PICC (the People’s Insurance Company of China); it was tiny at the time. We helped them to grow.

I also received the first foreign life insurance license in China, for AIA (The American International Assurance Co.). To date, there has been no other foreign life insurance company in China. It took me 20 years of hard work to get that license.

We also introduced an agency system in China. They had none. Their life company employees would get a salary whether they sold something or not. With the agency system of course you get paid a commission if you sell something. Once that agency system was installed, it went on to create more than a million jobs.

R&I: So Starr’s success has meant success for the Chinese insurance industry as well.

Hank Greenberg: That’s partly why we’re going to be celebrating that anniversary there next month. That celebration will occur alongside that of IBLAC (International Business Leaders’ Advisory Council), an international business advisory group that was put together when Zhu Rongji was the mayor of Shanghai [Zhu is since retired from public life]. He asked me to start that to attract foreign companies to invest in Shanghai.

“It turns out that it is harder [for China] to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

Shanghai and China in general were just coming out of the doldrums then; there was a lack of foreign investment. Zhu asked me to chair IBLAC and to help get it started, which I did. I served as chairman of that group for a couple of terms. I am still a part of that board, and it will be celebrating its 30th anniversary along with our 100th anniversary.

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We have a good relationship with China, and we’re candid as you can tell from the op-ed I published in the Wall Street Journal. I’m told that my op-ed was received quite well in China, by both Chinese companies and foreign companies doing business there.

On August 29, Mr. Greenberg published an opinion piece in the WSJ reminding Chinese leaders of the productive history of U.S.-Sino relations and suggesting that Chinese leaders take pragmatic steps to ease trade tensions with the U.S.

R&I: What’s your outlook on current trade relations between the U.S. and China?

Hank Greenberg: As to the current environment, when you are in negotiations, every leader negotiates differently.

President Trump is negotiating based on his well-known approach. What’s different now is that President Xi (Jinping, General Secretary of the Communist Party of China) made himself the emperor. All the past presidents in China before the revolution had two terms. He’s there for life, which makes things much more difficult.

R&I: Sure does. You’ve got a one- or two-term president talking to somebody who can wait it out. It’s definitely unique.

Hank Greenberg: So, clearly a lot of change is going on in China. Some of it is good. But as I said in the op-ed, China needs to be treated like the second largest economy in the world, which it is. And it will be the number one economy in the world in not too many years. That means that you can’t use the same terms of trade that you did 25 or 30 years ago.

They want to have access to our market and other markets. Fine, but you have to have reciprocity, and they have not been very good at that.

R&I: What stands in the way of that happening?

Hank Greenberg: I think there are several substantial challenges. One, their structure makes it very difficult. They have a senior official, a regulator, who runs a division within the government for insurance. He keeps that job as long as he does what leadership wants him to do. He may not be sure what they want him to do.

For example, the president made a speech many months ago saying they are going to open up banking, insurance and a couple of additional sectors to foreign investment; nothing happened.

The reason was that the head of that division got changed. A new administrator came in who was not sure what the president wanted so he did nothing. Time went on and the international community said, “Wait a minute, you promised that you were going to do that and you didn’t do that.”

So the structure is such that it is very difficult. China can’t react as fast as it should. That will change, but it is going to take time.

R&I: That’s interesting, because during the financial crisis in 2008 there was talk that China, given their more centralized authority, could react more quickly, not less quickly.

Hank Greenberg: It turns out that it is harder to change, because they have one leader. My guess is that we’ll work it out sooner or later. Trump and Xi have to meet. That will result in some agreement that will get to them and they will have to finish the rest of the negotiations. I believe that will happen.

R&I: Obviously, you have a very unique perspective and experience in China. For American companies coming to China, what are some of the current challenges?

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Hank Greenberg: Well, they very much want to do business in China. That’s due to the sheer size of the country, at 1.4 billion people. It’s a very big market and not just for insurance companies. It’s a whole range of companies that would like to have access to China as easily as Chinese companies have access to the United States. As I said previously, that has to be resolved.

It’s not going to be easy, because China has a history of not being treated well by other countries. The U.S. has been pretty good in that way. We haven’t taken advantage of China.

R&I: Your op-ed was very enlightening on that topic.

Hank Greenberg: President Xi wants to rebuild the “middle kingdom,” to what China was, a great country. Part of that was his takeover of the South China Sea rock islands during the Obama Administration; we did nothing. It’s a little late now to try and do something. They promised they would never militarize those islands. Then they did. That’s a real problem in Southern Asia. The other countries in that region are not happy about that.

R&I: One thing that has differentiated your company is that it is not a public company, and it is not a mutual company. We think you’re the only large insurance company with that structure at that scale. What advantages does that give you?

Hank Greenberg: Two things. First of all, we’re more than an insurance company. We have the traditional investment unit with the insurance company. Then we have a separate investment unit that we started, which is very successful. So we have a source of income that is diverse. We don’t have to underwrite business that is going to lose a lot of money. Not knowingly anyway.

R&I: And that’s because you are a private company?

Hank Greenberg: Yes. We attract a different type of person in a private company.

R&I: Do you think that enables you to react more quickly?

Hank Greenberg: Absolutely. When we left AIG there were three of us. Myself, Howie Smith and Ed Matthews. Howie used to run the internal financials and Ed Matthews was the investment guy coming out of Morgan Stanley when I was putting AIG together. We started with three people and now we have 3,500 and growing.

“I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.” — Maurice “Hank” Greenberg, chairman and CEO, C.V. Starr & Co. Inc.

R&I:  You being forced to leave AIG in 2005 really was an injustice, by the way. AIG wouldn’t have been in the position it was in 2008 if you had still been there.

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Hank Greenberg: Absolutely not. We had all the right things in place. We met with the financial services division once a day every day to make sure they stuck to what they were supposed to do. Even Hank Paulson, the Secretary of Treasury, sat on the stand during my trial and said that if I’d been at the company, it would not have imploded the way it did.

R&I: And that fateful decision the AIG board made really affected the course of the country.

Hank Greenberg: So many people lost all of their net worth. The new management was taking on billions of dollars’ worth of risk with no collateral. They had decimated the internal risk management controls. And the government takeover of the company when the financial crisis blew up was grossly unfair.

From the time it went public, AIG’s value had increased from $300 million to $180 billion. Thanks to Eliot Spitzer, it’s now worth a fraction of that. His was a gross misuse of the Martin Act. It gives the Attorney General the power to investigate without probable cause and bring fraud charges without having to prove intent. Only in New York does the law grant the AG that much power.

R&I: It’s especially frustrating when you consider the quality of his own character, and the scandal he was involved in.

In early 2008, Spitzer was caught on a federal wiretap arranging a meeting with a prostitute at a Washington Hotel and resigned shortly thereafter.

Hank Greenberg: Yes. And it’s been successive. Look at Eric Schneiderman. He resigned earlier this year when it came out that he had abused several women. And this was after he came out so strongly against other men accused of the same thing. To me it demonstrates hypocrisy and abuse of power.

Schneiderman followed in Spitzer’s footsteps in leveraging the Martin Act against numerous corporations to generate multi-billion dollar settlements.

R&I: Starr, however, continues to thrive. You said you’re at 3,500 people and still growing. As you continue to expand, how do you deal with the challenge of attracting talent?

Hank Greenberg: We did something last week.

On September 16th, St. John’s University announced the largest gift in its 148-year history. The Starr Foundation donated $15 million to the school, establishing the Maurice R. Greenberg Leadership Initiative at St. John’s School of Risk Management, Insurance and Actuarial Science.

Hank Greenberg: We have recruited from St. John’s for many, many years. These are young people who want to be in the insurance industry. They don’t get into it by accident. They study to become proficient in this and we have recruited some very qualified individuals from that school. But we also recruit from many other universities. On the investment side, outside of the insurance industry, we also recruit from Wall Street.

R&I: We’re very interested in how you and other leaders in this industry view technology and how they’re going to use it.

Hank Greenberg: I think technology can play a role in reducing operating expenses. In the last 70 years, you have seen the expense ratio of the industry rise, and I’m not sure the industry can afford a 35 percent expense ratio. But while technology can help, some additional fundamental changes will also be required.

R&I: So as the pre-eminent leader of the insurance industry, what do you see in terms of where insurance is now an where it’s going?

Hank Greenberg: The country and the world will always need insurance. That doesn’t mean that what we have today is what we’re going to have 25 years from now.

How quickly the change comes and how far it will go will depend on individual companies and individual countries. Some will be more brave than others. But change will take place, there is no doubt about it.

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More will go on in space, there is no question about that. We’re involved in it right now as an insurance company, and it will get broader.

One of the things you have to worry about is it’s now a nuclear world. It’s a more dangerous world. And again, we have to find some way to deal with that.

So, change is inevitable. You need people who can deal with change.

R&I:  Is there anything else, Mr. Greenberg, you want to comment on?

Hank Greenberg: I think I’ve covered it. &

The R&I Editorial Team can be reached at [email protected]