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Cyber Thieves Are Robbing You in New Ways. Will Your Insurance Provide Protection?

Social engineering, phishing and crypto-currency burglary all represent evolving methods of theft that challenge traditional crime and cyber policies.
By: | June 26, 2018 • 6 min read

Theft is not a new threat. But it is taking on new forms in an increasingly digital world.

Cyber thieves can infiltrate organizations and execute fraud in any number of ways — through a phony email or phone call, a corrupted link, or by targeting vulnerable digital currency, to name just a few.

Businesses are reporting more security breaches and incidents of cyber fraud than ever before. According to Kroll’s 2018 Global Fraud and Risk Report, 84 percent of surveyed executives reported that their company experienced at least one instance of fraud in the previous year, while 86 percent also said their company experienced a cyber attack involving data theft.

Both of those percentages represent all-time highs.

As the frequency and nature of these incidents increase and evolve in complexity, creating insurance solutions to help companies recoup their losses resulting from the ever-changing nature of the risk is an industry-wide challenge.

“Crime insurance traditionally would cover the direct loss of funds or property resulting from theft. Cyber liability insurance would take on the indirect consequential loss to a third party,” said James Kardaras, Underwriting Director, Crime and Fidelity, Nationwide. “What they have in common is the use of a computer for illicit purposes, but there remain gaps and gray areas where much of cyber-related risk remains uninsured.”

Stand-alone cyber policies and traditional crime and fidelity policies alike traditionally did not protect against losses incurred by an employee willingly transferring funds to a fraudulent account, even if that employee was duped by hackers. The emergence of crypto-currency like bitcoin makes matters more complicated, since regulators and insurers are not sure how to qualify or quantify its value.

Social engineering, phishing, and theft of crypto-currency all represent evolving methods of theft that muddle the traditional definitions of fraud and challenge traditional notions of how crime and cyber policies will respond to such losses.

Sophisticated Social Engineering

James Kardaras, Underwriting Director, Crime and Fidelity

Social engineering fraud, also known as business email compromise, is often a focused and well-planned attack. In this case, the thief impersonates either a senior official within the target company, a vendor or a customer, emulating their style of speech from behind a fake email account.

In the phony email, the impersonator directs an employee to send valuable data or to wire a sum of money to an external account.

“Employees want to do well, either by pleasing the boss or pleasing the customer, and if the email conveys a sense of urgency, the employee may be more likely to bypass typical verification protocols to complete the request. By the time the mistake is uncovered, it’s usually too late to stop the transaction or even trace where the data or the funds have gone,” Kardaras said.

Today, social engineering schemes have evolved to include the fraudulent transfer of tangible property, wherein the perpetrator, posing perhaps as a sales executive attending a conference, asks an employee to send or reroute a shipment of goods to the show site or a nearby hotel. The thieves then intercept the shipment and make off with the goods.

“If an employee willfully completes these requests, a traditional crime and fidelity policy would not recognize this as theft and wouldn’t provide coverage,” Kardaras said. “Cyber policies would likely not respond either, since there has been no breach of the company’s network.”

Financial Phishing

Like social engineering, phishing schemes involve scammers posing as trustworthy third parties — typically a bank. But rather than inducing an internal employee to transfer funds or data, phishing emails lure recipients to click on a corrupted link under the guise that they need to update or verify their user information.

These links have served as vehicles to infect companies’ networks with malware or ransomware, but increasingly they redirect employees to copycat websites where they enter private information like company account numbers, which are then used to access funds directly.

“Financial phishing, which seeks a more direct and immediate payout, now accounts for more than 50 percent of all phishing attacks,” Kardaras said.

Attacks specifically targeting the financial institutions themselves are also becoming more common. Malevolent links sent via a phishing email can help hackers gain access to an employee’s systems.

“This technology enables hackers to gain remote access to employees’ computer terminals at banks, follow their movements, and track what type and what volume of transfers they conduct each day,” Kardaras said. They can then mimic those actions to make fraudulent transfers into their own accounts, but of a volume and size small enough not to raise any red flags.”

Crime insurance could potentially respond to protect insureds from these losses, if the risks are identified, underwritten to, and the policy wording is drafted accordingly. One problem is that many victims don’t register the fraud until it becomes significant. It is estimated that banks across Europe and the U.S. have lost hundreds of millions through these unauthorized transfers.

Crypto-Currency Theft

The emergence of bitcoin and other virtual currency makes recovering from cyber theft even more complicated. Crime and fidelity policies will typically cover the loss of money, securities or property, but virtual currency does not fall within traditional definitions under these insurance policies.

“If an organization using these virtual currencies suffers a loss of virtual currency, depending on the policy’s definitions, it is possible that such a loss would not be covered if it is not included within the policy’s definitions of money, securities or property,” Kardaras said.

Additionally, the fluctuating value of bitcoin would make it difficult for underwriters to evaluate the risk associated with a bitcoin store, and to determine exactly how much a claim is worth in the event bitcoin is stolen. Nonetheless, it is estimated that more than $1 billion worth of virtual currency has been stolen over the past decade.

As bitcoin grow more legitimate and widespread, so likely will the corresponding risk of crypto-currency theft.

Bridging the Shortfall of Coverage Solutions

Traditional crime and fidelity policies were crafted by the Surety and Fidelity Association of America in the 1990s, and much of their language has not been updated to reflect modern-day risks.

Various carriers have attempted to address and clarify the gray areas in crime and cyber coverage via exclusionary or enhancement endorsements attached to the policy. A cyber policy may typically exclude, for example, losses incurred via fraudulent funds transfer stemming from a social engineering scam. Similarly, traditional crime policies may explicitly exclude any coverage for digital currencies.

These new endorsements and policy wording providing affirmative coverage for these evolving risks seek to seal the gaps and eliminate the confusion emanating from the complex and rapidly-developing cyber exposures.

“For commercial firms, Nationwide may offer protection for fraudulently-induced funds transfers resulting from social engineering scenarios where such losses would not be picked up by traditional policies,” Kardaras said.

“For financial institutions, we offer a separate, computer crime policy form updated with language that may protect businesses from email compromise as well as any unauthorized access to company funds resulting from a virus or malware. Protection for crypto currency losses are underwritten on a case-by-case basis.”

In recognition of the complexity and challenges that the growing cyber-theft landscape presents, Nationwide’s fidelity and cyber liability teams work together to offer insureds complementary coverage.

“We don’t work in silos,” Kardaras said. “We work hand in hand to offer coverage that meets the spectrum of our customers’ needs, from first-party crime to computer fraud and third-party liability and everything in between.”

To learn more, visit https://mls.nationwideexcessandsurplus.com/fs/products/commercial-crime/.

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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 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]