Cyber Risk

Keep the Dialogue Open

As cyber threats become more sophisticated, risk managers must understand and assess evolving exposures.
By: | August 3, 2016 • 7 min read

A shut-down, or even a partial disruption, is the stuff of nightmares for risk managers and C-suites. Business interruption (BI) and contingent business interruption (CBI) policies can help organizations weather those kind of crises, but the coverage is complex, and has only become more so since cyber exposures came to the fore.

Advertisement




In order to help minimize BI and CBI losses, risk managers must establish and maintain an open dialogue with C-suite executives on a continuous basis.

Open communication will give companies the agility to respond quickly if a business is shut down or production is halted by a cyber attack, determine the best way to assess income loss, and also to protect the company’s reputation.

Prior to a loss, that open dialogue will also help everyone reach a consensus about coverage needs and whether sufficient limits are in place.

Traditional property and BI policies will typically insure against a physical loss or damage to property, however many exclude cyber attacks, even if the cyber attack causes property damage.

As cyber threats become more sophisticated, risk managers and their companies need to better understand and assess these evolving exposures, and to devise an appropriate mitigation strategy and emergency response plan.

Understanding and Measuring the Claim

Al Gier, director of global risk management and insurance at General Motors, said that BI and CBI are often the most complex form of property losses when trying to quantify the actual loss.

“They require a significant marshaling of the risk management, supply chain, finance, marketing, purchasing and distribution functions, in order to support the claim,” he said. “Added to that is the work that people are already doing behind the scenes to bring their company back on line.”

He added that one way of assessing loss is by using pre-loss production schedules, sales and growth projections, and budgets.

Rick Roberts, president and director of risk management and employee benefits, Ensign-Bickford Industries

Rick Roberts, president and director of risk management and employee benefits, Ensign-Bickford Industries

Rick Roberts, president and director of risk management and employee benefits for Ensign-Bickford Industries and immediate past president of RIMS, said there is often a sizeable difference between a company’s loss estimate and the actual loss.

“There are two approaches to BI claims — the first is a top-down approach and the second is bottom-up,” he said.

“I prefer the bottom-up approach that measures lost income plus any continuing expenses as it’s easier to understand.”

Dan Holden, manager of corporate risk and insurance for Daimler Trucks North America, said that risk managers need to explain to the C-suite how BI or CBI coverage would be triggered, what it would cover and for how long.

That allows management to focus on potential events in order to mitigate against any revenue interruption, he said.

Robert Reeves, partner at EY’s Fraud Investigation and Dispute Services (FIDS) practice, said that should a loss occur, risk managers need to help senior management understand the claim, as well as the claims process and the potential range of the claim.

“[BI and CBI] require a significant marshaling of the risk management, supply chain, finance, marketing, purchasing and distribution functions, in order to support the claim.” — Al Gier, director of global risk management and insurance, General Motors

He added that when assessing a loss, it’s also important to take into account both sales and production.

“Sales is really focused on demand and production is focused on capacity,” he said. “So no matter what industry you are in, you have to look at both factors.”

Selecting the Right Policy

Advertisement




Dave Finnis, executive vice president and national property practice leader at Willis Towers Watson, said that most property insurance policies won’t provide coverage as standard in the event of a cyber attack unless there was evidence of physical damage.

“I am seeing a lot more instances where these kinds of occurrences are becoming a reality,” he said. “In the last year, a German power plant had a cyber attack and suffered physical damage when the hackers accessed one of their furnaces, but fortunately they were covered under their property policy.”

Reeves said that it is important to read the policy’s wording first as most cyber insurance will provide coverage for a BI claim, but won’t necessarily cover a CBI claim.

Josh Gold, a cyber insurance attorney at Anderson Kill’s New York office, said that BI or CBI coverage should provide for loss of business income at a minimum, covering both lost profits and continuing expenses.

He added that it was important to build in coverage for extra expenses, such as the cost of using other facilities while your operations are down, bringing consultants in, or moving your system to a new cloud platform.

Doug Backes, FM Global’s claims manager, said that it is also important to match the coverage to the loss.

“From our perspective, we have always approached data as property and it needs to be covered as such,” he said. “Whether data is damaged in a fire or as a result of a cyber attack, there needs to be cover for that.”

Impact on Reputation

Reeves said that an often-overlooked impact of a BI or CBI claim is on a company’s reputation with its customers, employees and shareholders.

“Once the physical loss has gone away, then you have got to make sure that you manage your reputation,” he said. “So you need to let your customers know what is happening, how long you are going to be down and what your mitigation strategy is.”

Al Gier, director of global risk management and insurance, General Motors

Al Gier, director of global risk management and insurance, General Motors

Citing the example of Target’s major data breach, which has cost the company $300 million to date, Gold said that the impact of a cyber attack often runs much deeper than the initial loss, and it can damage reputation in terms of customer privacy and payment details.

“From a loss mitigation 101 standpoint, you wouldn’t want to exacerbate the problem by being less than candid about what is going on,” he said.

“Of course, a lot of risk mitigation can be done before a breach occurs, to ensure that you have the appropriate plan and insurance policy in place.”

Gier said that the impact of a BI or CBI loss on a business’ reputation depended largely on the cause of the loss, as well as the company’s response time.

“Companies can do a lot to minimize the risk of BI or CBI losses on their reputation by maintaining ultimate sources of supply, keeping extra inventory and having a thorough understanding of the financial impact of BI in protecting the most valuable parts of the business,” he said.

Working in Partnership

Reeves said that risk managers need to explain to senior managers how their BI and CBI policies work and to identify key areas that need to be written into the coverage based on previous claims experience.

“The C-suite needs to make sure that those resources are available and the risk manager needs to make sure that everyone has realistic expectations about the time frame for the claims process.” — Jill Dalton, managing director, Aon Global Risk Consulting

He added that it was also important to help them understand the interdependencies between the different parts of their business in the supply chain.

Jill Dalton, managing director, Aon Global Risk Consulting

Jill Dalton, managing director, Aon Global Risk Consulting

“We had a client with a very small site in the south that got hit by a tornado,” he said.

Initially they thought it wouldn’t have much of a financial impact, but they soon realized that it was the only plant that produced a small component used in all of their products.

“They dodged a real bullet, because fortunately they were able to get alternative sourcing, otherwise they would have been facing a $1 billion loss,” Reeves said.

Jill Dalton, managing director of Aon Global Risk Consulting, said that C-suites and risk managers need to work in unison.

“The C-suite needs to make sure that those resources are available and the risk manager needs to make sure that everyone has realistic expectations about the time frame for the claims process,” she said.

Carlos Moran, director of claims at Aon Global Risk Consulting, added that businesses need to develop a contingency plan in order to maintain critical operations in the event of a loss.

Advertisement




“Risk managers have a very difficult job,” FM Global’s Backes said. “Sometimes it’s very difficult for them at times to get the attention and buy-in from the C-suite.

“But when they can do that successfully, they can build out greater resiliency and redundancy into the company’s practices and procedures.” &

Alex Wright is a U.K.-based business journalist, who previously was deputy business editor at The Royal Gazette in Bermuda. You can reach him at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

Advertisement




That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

Advertisement




Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]