Analytics

Cyber Risk Models Remain Elusive

The lack of accurate data, claim complexity and other factors are preventing predictive modeling from being effective for cyber risk. 
By: | May 6, 2015 • 6 min read

In a perfect world, the ability to model for catastrophic cyber losses would be welcomed with open arms by carriers, brokers and most of all, risk managers.

After all, modeling has been used effectively to identify and quantify patterns and trends that can be used to predict other types of future catastrophic claim outcomes and set pricing standards in coverage areas.

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Whether it is estimating wind damage in the Midwest or flooding along the coasts, predictive modeling has given the P&C business an excellent analytics-driven tool.

When it comes to modeling for catastrophic cyber losses in the commercial insurance business, however, experts say that reality won’t be happening any time soon.

“The current state of cyber modeling is like trying to use the count of arrests for a crime to figure out the dollar losses from theft,” said Mark Clancy, chief information security officer for The Depository Trust & Clearing Corp. (DTCC), a New York City-based post-trade market infrastructure for the global financial services industry. “They are related, but not in all the ways you want right now.”

 Mark Clancy, chief information security officer, The Depository Trust & Clearing Corp.

Mark Clancy, chief information security officer, The Depository Trust & Clearing Corp.

Clancy, who also serves as CEO of Soltra, DTCC’s cyber security information sharing platform, was among the CEOs of leading technology, financial services, utility, health care and cyber security companies, as well as representatives from government and law enforcement agencies, at the White House Summit on Cybersecurity and Consumer Protection at Stanford University in early March. During the event, President Barack Obama unveiled his new executive order on improving information sharing between government and the private sector.

Loren Nickel, regional director and actuary with Aon Global Risk Consulting in San Francisco, said that while there are minor examples of modeling happening for cyber risks, there is not a useful data set with the depth of information the industry would need for a CAT model.

“Cyber risks are a very different risk scenario than a property CAT risk, which is very easy to define and identify, and is basically only a single coverage,” he said. “When you are talking about cyber and data risks, there are many more issues and complexities.”

For example, Nickel explained, you can have two different but similar companies in size and scope and they could have a completely different IT infrastructure, so gauging the exposure is the tough part when trying to create a model that would work for both.

“Cyber risk is the same, there is no history of similar events and so many events are not comparable. Part of the problem is you are trying to model a non-linear system.” — Mark Clancy, chief information security officer for The Depository Trust & Clearing Corp.

John Farley, vice president and cyber risk practice leader at global brokerage HUB International, in Campbell Hall, N.Y., agreed that cyber claims data is very hard to come by, unlike other lines of coverage, because information is not readily shared, making cyber claims difficult to underwrite.

“A large sampling of claims data for cyber claims is not happening right now,” he said. “There no doubt is a reluctance to share because many companies are not willing to advertise that they have been breached and what it has cost them. That’s the first challenge.”

Public-Private Sharing on the Radar

Aon’s Nickel said that even when with dealing with a single client, they are very reticent to share breach data. And even if you get the data, how to define a breach is much more complex than with a destroyed home or office building.  In fact, he added, a breach can go undetected for extended periods and may not even cause any damage.

“Verizon has reported that half of breaches go undetected for months, and if someone doesn’t steal or damage anything, is it a breach?” he asked.

New York City-based Robert Rosenzweig, assistant vice president at insurance brokerage DeWitt Stern, said the idea of a public-private partnership sharing information on potential data breach issues makes sense, as it would allow insurers to build a more accurate model for pricing and the coverage being offered under their policies.

Also, with more accurate models it would be fair to assume that the insurers currently offering some modicum of cyber liability coverage would have more balanced portfolios that would be more sustainable in the long run, Rosenzweig said.

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“This would create more market stability,” he said, “as insurers would be more likely to offer this product for the long-term if they can underwrite it profitably and it would likely increase the take-up rate on businesses buying cyber liability coverage by making the coverage more accessible.”

Rosenzweig said that while most of the large carriers are trying to use modeling for cyber risks, the question becomes how accurate are their models.

Modeling is limited because data is not being shared.– Robert Rosenzweig, assistant vice president, DeWitt Stern

“This is a product in its infancy,” he said. “Market penetration is not that high and it’s mainly only within the Fortune 1000.” As a result, carriers don’t know the exposure to small and medium U.S. businesses.

Rosenzweig said that some carriers have a better sense of what they are doing in the marketplace, with access to more actuarial data, but without a public-private partnership, modeling is limited because data is not being shared.

“For example, the industry is not privy to losses that might have occurred with businesses that are uninsured.”

Also, the insurers doing the early modeling might enjoy a competitive advantage, so they may be reluctant to share that information.

“They are thinking ‘Why give up our edge?’ ” he said. “The federal government wants this to happen and there are obvious reasons why. The more businesses that are buying this type of coverage, the less impact CAT losses in the middle and small markets would have on the global economy.”

John Farley, vice president and cyber risk practice leader, HUB International

John Farley, vice president and cyber risk practice leader, HUB International

HUB International’s Farley pointed out that cyber risks know no borders, making them much different and complex than data used in the traditional property underwriting process.

“We know earthquakes in Japan will not cause a hurricane in Florida, but cyber claims are much different,” he said. “Something that can start in one corner of the world in a matter of seconds can affect thousands of networks at once. Imagine if what happened to Sony also simultaneously happened to thousands of companies around the world.”

DTCC’s Clancy said the risk domain for cyber is non-linear, meaning that a small or large event can occur and there is no way to tell the difference between the two.

He offered the analogy of taking all the fans at any NFL stadium and lining them up by height. You would get a uniform distribution without huge outliers. If you did the same thing using their net worth and Bill Gates was at the game, that single outlier can impact the outcome.

“Cyber risk is the same, there is no history of similar events and so many events are not comparable,” he said. “Part of the problem is you are trying to model a non-linear system.”

Also, non-cyber perils are fairly static — it’s not like there’s a lot of new weather rapidly being invented. And you typically aren’t faced with situations where there’s a version two of a particular peril and it looks nothing like version one. But that’s exactly what people have to confront in the cyber world, Clancy said.

“People have been trying to steal money from the financial infrastructure for a long time, but today people are attacking because they are mad at someone for stopping payments to WikiLeaks,” he said. “We still don’t know what ‘normal’ looks like.”

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Rich DePiero, head of cyber North America for Swiss Re Corporate Solutions in New York City, said many markets have trouble figuring out how cyber risk affects an industry because there are so many causes that can lead to different types of losses.

“The industry is behind the curve on that aspect of cyber,” he said. “For example, if an IT system that everyone uses as a service goes down and leads to a loss, how will it trickle through the industry?”

The most progress Swiss Re sees going on among clients is with the federal government openly encouraging data sharing among peers within specific industry segments.

“Financial institutions and airlines have been doing it, and manufacturers are doing it more,” he said. “With some of the breaches last year in retail space, the information was spread among peers within a week or so. That has to happen more.”

Ryan Gibney, assistant vice president at brokerage firm Lockton Cos. in Washington, D.C., noted that the data breach at health care insurer Anthem represents a very scary cyber risk scenario for the insurance industry because the event was an aggregate loss with multiple insureds.

Cyber Complexity Presents Another Hurdle

In the Anthem case, hackers gained access to the personal information of as many as 80 million Americans, mainly current and former members of Anthem health plans.

“That breach affected every organization whose employees have or had health care through Anthem,” he said. “Thousands of companies would potentially have a legal reporting obligation, but Anthem stepped up and notified all those affected.”

Plus, as more and more data shifts to the cloud, the concept of a large provider platform being breached could mean hundreds of thousands of smaller companies also could be breached.

Ryan Gibney, assistant vice president, Lockton Cos.

Ryan Gibney, assistant vice president, Lockton Cos.

Those organizations would be unable to transact normal business activities and any such event could shock the insurance industry, Gibney said.

“In one day you could have 500 cyber claims come in the door from a single event,” he said.

For CAT modeling, that’s a serious hurdle, he said. The industry does not enjoy 50-75 years of actuarial data with which to model, and there have not been a lot of widely publicized breaches until the last six months to a year.

“Many carriers are pushing modeling, as are markets like Lloyd’s of London, but there just is not enough actuarial data to do it accurately yet,” he said. “It’s easy to see why storms are so much more predictable than cyber events.”

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On the upside, Gibney noted, the growth of cyber insurance is driving increased awareness of cyber security at all sizes and types of organizations. In fact, insurance applications and underwriters are asking for better cyber and data security controls.

Dewitt Stern’s Rosenzweig said the growing number of cyber criminals and data attacks, whether the result of a political group, state-sponsored activity or the usual criminal element, mean that effective modeling, while still distant, is necessary.

“The main reason we have data security regulations in place is that for the most part we really like the benefits and creature comforts we get by giving our data to businesses, so there is no turning back,” he said. “It’s just very early in the process.”

Tom Starner is a freelance business writer and editor. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

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 and 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]