Technology


The cyber insurance market for small- to mid-sized companies is much friendlier than the market for larger insureds, according to the findings of an annual survey just released by Betterley Risk Consultants.

The Cyber/Privacy Insurance Market Survey 2015 notes that there are many insurance products competing for the business of small and mid-sized (SME) organizations.

Brokers are actively selling cyber policies to their SME insureds, and more are buying than ever before, as they realize the potential for liability, breach and response costs, arising out of the possession of private data.

The report says:

Rates for the SME segment are still competitive and renewals are generally flat, even a bit soft, undoubtedly affected by the numerous insurers getting a foothold in the cyber insurance market. Smaller insureds tend to have lower limits and often have relatively modest claims.”

In contrast, cyber coverage for larger organizations, especially those in retail and healthcare, are finding it more difficult to buy adequate limits at a reasonable price, the report suggests, as insurers are increasingly strict about adherence to cyber security and payment card industry standards.

For the larger/retail/healthcare insured, rates are rising, with increases in the 10-25 percent range most common. But the report points out:

This is for untroubled organizations; it’s worse (up to 200 percent) if they have claims experience that has yet to result in significantly improved cybersecurity measures.”

While annual premium volume information about the U.S. cyber insurance market is hard to come by, the report concludes that annual gross written premium is growing and may be as much $2.75 billion in 2015, up from $2 billion in last year’s report.

We think the market has nowhere to go but up—as long as insurers can still write at a profit.”

This year’s report includes products offered by 31 insurers, up from 28 in 2014.

Check out the Insurance Information Institute’s (I.I.I.) online resource for business insurance here.

 

Technology is not enough in the fight against cybercrime, effective cybersecurity measures require policy and process changes as well.

That’s the takeaway from an analysis of cyber-risk spending included in the 2015 U.S. State of Cybercrime Survey recently released by PwC.

While cybersecurity budgets are on the rise, companies are mostly reliant on technology solutions to fend off digital adversaries and manage risks.

Among the 500 U.S. executives, security experts and others from public and private sectors responding to the survey, almost half (47 percent) said adding new technologies is a spending priority, higher than all other options.

Notably, only 15 percent cited redesigning processes as a priority and 33 percent prioritized adding new skills and capabilities.

When asked whether they have the expertise to address cyber risks associated with implementation of new technologies, only 26 percent said they have capable personnel on staff. Most rely on a combination of internal and external expertise to address cyber risks of new solutions.

PWCCyberSpending2015

As PwC advises:

Companies that implement new technologies without updating processes and providing employee training will very likely not realize the full value of their spending. To be truly effective, a cybersecurity program must carefully balance technology capabilities with redesigned processes and staff training skills.”

Employee training and awareness continues to be a critical, but often neglected component of cybersecurity, PwC said. Only half (50 percent) of survey respondents said they conduct periodic security awareness and training programs, and the same number offer security training for new employees.

Some 76 percent of respondents to the survey said they are more concerned about cybersecurity threats this year than in the previous 12 months, up from 59 percent the year before.

As PwC noted, in today’s cybercrime environment, the issue is not whether a business will be compromised, but rather how successful an attack will be.

Check out Insurance Information Institute (I.I.I.) facts and statistics on cybercrime here.

The unfolding story on what is being described as the largest cyberattack into the systems of the United States government reads like an episode out of CSI Cyber.

Today the head of the Office of Personnel Management (OPM) Katherine Archuleta resigned as fallout continued in the wake of Thursday’s revelation that the second of two massive data breaches exposed the personal data of 21.5 million federal employees, contractors, applicants and family members.

This follows the previous breach OPM announced in June in which some 4.2 million federal personnel records were exposed.

The magnitude of the second breach is incredible. In a release, OPM states:

OPM has determined that the types of information in these records include identification details such as Social Security Numbers; residency and educational history; employment history; information about immediate family and other personal and business acquaintances; health, criminal and financial history; and other details. Some records also include findings from interviews conducted by background investigators and fingerprints. Usernames and passwords that background investigation applicants used to fill out their background investigation forms were also stolen.”

As the New York Times reports here, every person given a background check for the last 15 years was probably affected (that’s 19.7 million people), as well as 1.8 million others, including their spouses and friends.

It is thought that both OPM attacks emanated from China, though this is not confirmed.

In a week in which reported technical issues halted trading on the New York Stock Exchange, grounded United Airlines flights and took the Wall Street Journal’s website offline for several hours, the OPM announcement once again highlights the limitless nature of cyber exposures.

Meanwhile, a joint report from Lloyd’s and the University of Cambridge, points to the insurance implications of a cyber attack on the U.S. power grid and potential aggregation issues for insurers.

A hypothetical blackout that plunges 15 states into darkness, including New York City and Washington DC, leaving 93 million people without power would result in estimated insurance claims of $21.4 billion, rising to $71.1 billion in the worst case scenario, the report suggests.

Insurers would see losses across many lines of business, including property damage, business interruption, contingent business interruption, liability, homeowners and events cancellation.

Claims across other areas of insurance not included in the estimate are also possible, such as: injury-related claims; auto; property fire; industrial accidents; and environmental liability.

As Lloyd’s says in the report, one of the biggest concerns for insurers is that cyber risk is not constrained by the conventional boundaries of geography, jurisdiction or physical laws:

The scalability of cyber attacks – the potential for systemic events that could simultaneously impact large numbers of companies – is a major concern for participants in the cyber insurance market who are amassing large numbers of accounts in their cyber insurance portfolio.”

A California Labor Commission ruling that an Uber driver is a company employee, not an independent contractor may dampen fears that the on-demand economy spells the end for workers compensation, liability and health insurance. At least for now.

As reported by numerous news outlets, here and here, the decision out of California – though it applies to a single driver – could significantly increase costs for the ride-sharing business if it is copied by other states and in other cases.

It could also have potential implications for other segments of the economy important to property/casualty insurers.

As the New York Times reports:

The classification of freelancers is in dispute across a number of industries, including at other transportation companies. And the debate is set to escalate as the number of online companies and apps like Uber and others rises.”

The ruling, which commentators say could hurt Uber’s $40 billion-plus valuation, orders Uber to pay Barbara Berwick, $4,152 in expenses for the time she worked as an Uber driver last year.

Here are a couple of key excerpts from the California Labor Commission decision:

Plaintiffs’ work was integral to Defendants’ business. Defendants are in business to provide transportation services to passengers. Plaintiff did the actual transporting of those passengers. Without drivers such as Plaintiff, Defendants’ business would not exist.”

And:

Defendants hold themselves as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation. The reality, however, is that Defendants are involved in every aspect of the operation.”

In response to the ruling (which it has appealed) Uber stated:

The California Labor Commission’s ruling is non-binding and applies to a single driver. Indeed it is contrary to a previous ruling by the same commission, which concluded in 2012 that the driver ‘performed services as an independent contractor, and not as a bona fide employee.’ Five other states have also come to the same conclusion.”

Potential insurance issues arising out of the on-demand or sharing economy are a recurring topic of conversation these days.

In a recent presentation I.I.I. president Dr. Robert Hartwig noted that traditional insurance will often not cover a worker engaged in offering labor or resources through these on-demand platforms.

For example, private passenger auto insurance generally won’t cover you while driving for Uber and a homeowners insurance policy won’t cover a homeowner for anything other than occasional rents of their property.

Also, Dr. Hartwig said: “Unless self-procured, on-demand workers (independent contractors) will generally have no workers comp recourse if injured on the job.”

A new report from ratings agency Standard & Poor’s warns that the credit ratings of U.S. financial services companies could be vulnerable to cyber risks in future.

In its analysis, S&P says:

Although the many successful cyber-attacks have not yet resulted in any changes in Standard & Poor’s Ratings Services’ ratings on financial services companies, we view cyber-security as an emerging risk that we believe has the potential to pose a higher credit risk to financial services firms in the future.”

And:

It’s not difficult to envisions scenarios in which criminal or state-sponsored cyber-attacks (for credit implications, we don’t differentiate the sources of intrusion) would result in significant economic effects, business interruption, theft, or reputational risk.”

S&P goes on to explain that while cyber attacks can result in losses, and possible market disruptions, so far they have not resulted in negative rating actions because the exposure of targeted companies has been contained by their own financial wherewithal and to some extent insurance programs.

Nevertheless, the damage to reputation, brand, or competitive position may likely only truly be known in the years ahead.

S&P notes that threat alone does not determine rating responses and threat risk varies by sector:

Our credit opinion takes a balanced view incorporating other related factors, including how susceptible a firm’s competitive position would be to a cyber attack, the effectiveness of its response plan, and what is the firm’s financial flexibility, liquidity, and capitalization regarding its ability to replenish capital post-event.

While all financial services companies targeted by major data breaches have emerged intact, S&P says it is increasingly wary about the persistence of cyber attacks and what that might mean for consumer confidence to engage in commerce with the brand going forward.

S&P says it views the threat for the insurance industry overall as medium, albeit risks for health insurers are higher. Adequate/strong enterprise risk management programs and the very strong capitalization of insurers are some of the offsetting risk factors.

While the cyber insurance market is still emerging, S&P expects premiums to more than double to $10 billion in the next five to 10 years from $2.5 billion now.

Hat tip to Insurance Journal which reports on this story here.

 

The financial impact of cyber exposures is close to exceeding those of traditional property, yet companies are reluctant to purchase cyber insurance coverage.

These are the striking findings of a new Ponemon Institute  survey sponsored by Aon.

Companies surveyed estimate that the value of the largest loss (probable maximum loss) that could result from theft or destruction of information assets is approximately $617 million, compared to an average loss of $648 million that could result from damage or total destruction of property, plant and equipment (PP&E).

Yet on average, only 12 percent of information assets are covered by insurance. By comparison, about 51 percent of PP&E assets are covered by insurance.

The survey found that self-insurance is higher for information assets at 58 percent, compared to 28 percent for PP&E.

In some ways, these results are not surprising.

Cyber insurance is a relatively new product, and while interest continues to increase, it will take time for the purchase rate to catch up with traditional insurances.

That said, the values at stake are enormous and as the report states, the likelihood of loss is higher for information assets than PP&E.

Another important takeaway from the survey is that business disruption has a much greater impact on information assets ($207 million) than on PP&E ($98 million).

This suggests the fundamental nature of probable maximum loss (PML) varies considerably for intangible assets vs. tangible assets, Ponemon says.

Business disruption represents 34 percent of the PML for information assets, compared to only 15 percent of the PML for PP&E.

A footnote states that while the survey results suggest PML in the neighborhood of $200 million, a growing number of companies are using risk analysis and modeling to suggest potential losses in excess of $500 million to over $1 billion and seek cyber insurance limit premium quotes and policy terms for such amounts.

More information on the growth in cyber insurance is available from the I.I.I. here.

Some 2,243 individuals involved in cyber and enterprise risk management at companies in 37 countries responded to the Ponemon survey.

Everyone wants to talk about autonomous vehicles, and for proof I.I.I. chief actuary Jim Lynch offers the AIPSO Residual Market Forum, at which he spoke in mid-April.

AIPSO manages most of the automobile residual market, where highest risk drivers get insurance. Each state has a separate plan for handling risky drivers and AIPSO services most of them in one way or another, acting as the linchpin in the $1.4 billion market, about 0.7% of all U.S. auto insurance written in 2013, according to Auto Insurance Report.

Though small, the residual market is important, but it’s not an area that would naturally lend itself to discussing the self-driving car. If cars could drive themselves, of course, there wouldn’t be much of a residual market.

Even so, I was one of three speakers at the forum’s panel exploring industry trends, and at AIPSO’s request, all three of us touched on autonomous cars.

Though he spoke last, Peter Drogan, chief actuary at AMICA Mutual Insurance, probably did the best job of laying out the future technology and some of its challenges. Particularly spooky was a 60 Minutes clip in which a hacker took over a car Lesley Stahl drove over a parking lot test course. She wasn’t driving fast, but she couldn’t stop after the hacker took over the brakes of her car.

Karen Furtado, a partner at Strategy Meets Action, a consultancy that helps insurers plan for the future, laid out the case for disruption. Autonomous vehicles will not only make vehicles safer, they will change driving habits. Fewer cars will be on the road, and more people will share them, summoning self-driving vehicles through ride-sharing apps, all of which could potentially shrink the $180 billion auto insurance market.

I’ve made my thoughts clear before, both in this blog and elsewhere: the technology will change driving forever, but it takes about three decades for auto technology to become common on roadways, giving insurers a lot of time to adjust. And some coverages, like comprehensive, will not be affected, as they protect cars when they aren’t in accidents.

A PowerPoint of my presentation is posted here.

A new report from across the pond points to a large gap in awareness when it comes to cyber risk and the use of insurance among business leaders of some of the UK’s largest firms.

Half of the leaders of these organizations do not realize that cyber risks can be insured despite the escalating threat, the report found.

Business leaders who are aware of insurance solutions for cyber tend to overestimate the extent to which they are covered. In a recent survey, some 52 percent of CEOs of large organizations believe that they have cover, whereas in fact less than 10 percent does.

Actual penetration of standalone cyber insurance among UK large firms is only 2 percent and this drops to nearly zero for smaller companies, according to the report.

While this picture is likely a result of the complexity of insurance policies with respect to cyber, with cyber sometimes included, sometimes excluded and sometimes covered as part of an add-on policy, the report says:

This evidence suggests a failure by insurers to communicate their value to business leaders in coping with cyber risk. This may, in part, reflect the new and therefore uncertain nature of this risk, with boards more focused on security improvement and recovery planning than on risk transfer. It nevertheless risks leaving insurance marginalized from one of the key risks facing firms.”

Senior managers in some of the UK’s largest firms were interviewed for the report published jointly by the British government and Marsh, with expert input from 13 London market insurers.

As a first step to raising awareness, Lloyd’s, the Association of British Insurers (ABI) and the UK government have agreed to develop a guide to cyber insurance that will be hosted on their websites.

Reuters has more on the report here.

I.I.I. chief actuary Jim Lynch looks into the future of self-driving cars:

I wrote about autonomous vehicles and insurance for the March/April edition of Contingencies magazine.

I argue that while the safety improvements will reduce the number of automobile accidents, any predictions of the end of automobile insurance look overblown today.

The first cars to drive themselves will only do so for a few minutes at a time – far from the curbside-to-curbside Dream Vehicle that gets most of the media attention. Any new auto technology takes two or three decades to cascade from a pricey option on luxury vehicles to standard equipment found on every used Chevy.

The slow rollout means claim frequency – the number of claims per hundred vehicles – is likely to decline over the next few decades at about the same rate as it has over the past five decades, giving insurers plenty of time to adapt, just as they have since the first policy was issued in Dayton, Ohio, in the 1890s.

Here is an excerpt:

The property/casualty industry will react as it has for decades, as regulation and innovation have made auto, products and the workplace safer. The impact will be carefully measured by actuaries, who will adjust rates as the innovations prove out. Insurers will find new coverages that customers will want.

The Dream Vehicle will change auto insurance, sure, but it won’t destroy it.”

The I.I.I. has an Issues Update on Self-Driving Cars and Insurance.

Cyber attacks against businesses may dominate the news headlines, but recent events point to the growing number and range of cyber threats facing public entities and government agencies.

City officials yesterday confirmed that city and county computer systems in Madison, Wisconsin were being targeted by cyber attackers in retaliation for the shooting death of Tony Robinson, an unarmed biracial man, by a Madison police officer last Friday. A Reuters report says the cyber attack is thought to have been initiated by hacker group Anonymous.

Then on Sunday the website of Colonial Williamsburg was hit in a cyber attack attributed to ISIS. The attack targeted the history.org website and comes just a week after the living history museum offered to house artifacts at risk of destruction in Iraq.

Meanwhile, Florida’s top law enforcement agency is reported to be investigating testing delays in public school districts caused by cyber attacks on the Florida Standards Assessment (FSA) testing system.

And a recent cyber attack at multiple New York City agencies including the office of the NYC mayor recently took down computer systems for most of a day.

There are many more examples.

Given the large amounts of confidential data held by public entities and government agencies, it’s not surprising that they are a target for cyber attacks.

Last year data breaches in the government/military sector accounted for 11.7 percent of U.S. breach incidents, according to the Identity Theft Resource Center (ITRC).

A GAO report here points to the cyber security risk to Federal agencies and critical infrastructure.

In a viewpoint at American City & County blog, Robin Leal, underwriting director at Travelers Public Sector Services recently warned of the growing cyber risks facing public sector organizations.

Leal cited data from a survey at the 2014 Public Risk Management Conference and 2014 National Association of Counties (NACo) conference showing that public officials’ confidence in their cyber protections is alarmingly low.

Only 13 percent of respondents to the survey were “very confident” that their public entity has adequate protection against cyber threats.

As well as written policies and procedures to handle cyber threats, Leal said public entities should consider cyber insurance.

Only 10 percent of current public sector clients add cyber protections to existing insurance policies, and for the majority of new business submissions cyber insurance is not part of their current coverage, Leal noted.

Check out the I.I.I. white paper Cyber Risks: The Growing Threat.

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