Category Archives: Cyber Risk

COVID-19 Meets Cyberrisk

As COVID-19 spreads, we’ve been hearing more about the importance of hygiene and maintaining “social distance.”

Last night I found out the cyberrisk conference I was scheduled to attend this morning had been changed to a “virtual” meeting. With so many events being canceled or postponed out of an abundance of caution over the spreading COVID-19 virus, it was nice to know the show would go on safely.

I’d already been working from home (thank you, Triple-I!) to avoid exposure during my train commute and potentially becoming a “vector” to family, friends, and co-workers. As I waited for the event to begin, I scrolled through my news feed and spotted several stories about risks related to increased remote work.

Cyberrisk featured prominently in these articles. Unprotected devices, they warned, can lead to data losses, privacy breaches, and ransomware attacks.

One article alluded to campaigns designed specifically to tap into concerns around COVID-19.

“We are already seeing targeted phishing campaigns globally,” said New Zealand Health IT chief executive Scott Arrol. “The cyber virus taking advantage of the biological virus.”

Arrol said hackers seeking to exploit fears of Covid-19 are sending fake ads or links with online viruses.

The message “might look like it has come from the World Health Organization, inviting you to register for more information,” he said. “You click on that link, you’ll be taken to fill out a form and then suddenly…you’re giving away personal information you shouldn’t.”

Technology can help us maintain social distance, but the devices we rely on need to be managed and protected, lest they make us even more vulnerable.

Insurance broker Aon has issued an advisory cautioning employers to take steps to ensure that work-from-home employees can connect to secure remote networks, a Claims Journal article says.

“Any time you’re taking about employees who are not used to working from home, who may not have the correct cybersecurity posture, a virtual private network (VPN) is critically important and having two-factor authentication is critically important,” Aon Senior Vice President Stephanie Snyder said.

A VPN connects remote users or regional offices to a company’s private internal network. Two-factor authentication adds a layer of security beyond a password to make sure a user is authorized to access the system.

Snyder added that telecommuters may be tempted to work from their laptops at a coffee shop – potentially exposing their computers to intrusion. She said employers need to have strict security protocols in place to avoid such exposures.

So, I wasn’t surprised when one of the first speakers at the event I was “attending” mentioned viral epidemics like COVID-19 as something underwriters just a few years ago would not have considered a factor in assessing cyber risk but now should.

As I’ve written before, increasingly interconnected risks require a holistic approach to risk management – one that takes into account preparation, mitigation, and built-in resilience. As COVID-19 has spread beyond its origins in Asia, we’ve been hearing more about the importance of hygiene and of maintaining “social distance.”

Technology can help us maintain social distance, but the devices we rely on need to be managed and protected, lest they make us even more vulnerable.

Consumers lack understanding of personal cyber insurance: I.I.I./J.D. Power Survey

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By Mary-Anne Firneno, Research Manager, Insurance Information Institute

Americans have embraced the Internet of Things. As consumers own more internet-connected devices and buy more products online and businesses use more electronic data and online storage, cyberattacks continue to occur.

Despite reports of ever-larger data breaches, awareness of the protection available to consumers through insurance has shrunk over the past year, according to a survey from the Triple-I and J.D Power.

The 2020 Consumer Cyber Insurance and Security Spotlight Survey℠: Consumer indifference is still a challenge for personal cyber insurers, found that only about one in 10 American consumers who have connected devices in their homes or vehicles say they have insurance to help them recover from a cyberattack. And close to half do not know whether they have this protection. Fewer connected device owners say they have cyberrisk insurance than when the Triple-I and J.D. Power polled them in 2018.

Yet consumers are interested in cyberrisk insurance. More than half of connected-device owners (56 percent) said they believed homeowners or auto policies should offer cybersecurity coverage.

So why don’t more consumers buy cyberrisk insurance? The 2020 Consumer Cyber Survey found that three-quarters of connected consumers are reluctant to pay more for cyberrisk coverage – despite the fact that cyber coverage is relatively inexpensive: about $10 from a package policy and about $40 for a separate one.

Persistent attitudes that cyber coverage is a not a product consumers are willing to purchase is an opportunity for insurance professionals to explain the value of personal cyber coverage.

Individuals Should Not Rely on Insurance to Protect Their Cryptocurrency Holdings

By Michael Menapace, Esq. 

Michael Menapace

Many individuals and businesses hold some amount of cryptocurrency.  According to a recent survey, nearly 10 percent of Americans have invested in cryptocurrency since the first Bitcoin was “mined” in 2009.  And, along with the rise in prevalence of virtual currencies in recent years has come a surge in cryptocurrency theft, with one Ponzi scheme defrauding cryptocurrency investors out of $2.9 billion dollars in 2019.  Those who invest in, use, and hold cryptocurrency should protect their assets.  While individuals can purchase insurance to protect themselves if certain types of assets are destroyed or stolen, such as a house, car, or personal property, individuals may have difficulty obtaining coverage for their cryptocurrency.

Bitcoin is just one cryptocurrency built on the technology called the blockchain.  Other virtual currencies include Ethereum, Ripple, Litecoin, Monero, and ZCash.

Homeowner’s insurance protects an insured against the loss of certain property.  For example, if a thief breaks into your home and steals your television, that loss will likely be a covered loss of property under a standard homeowner’s policy.  For an overview of what homeowners insurance typically covers, see here.

Is theft of cryptocurrency covered under homeowners insurance?

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But, is an owner of cryptocurrency insured if a thief hacks their computer and steals virtual currency?  Part of the answer relates to the question – what is cryptocurrency?  Are these virtual currencies a security, money, property, a commodity, or something else? As discussed below, it seems unlikely, and inappropriate, for the loss of cryptocurrency to be a covered loss under a homeowners policy.

The Securities and Exchange Commission takes the position that cryptocurrency is, or at least can be, a “security” and cautions that “issuers [of virtual currencies] cannot avoid the federal securities laws just by labeling their product a cryptocurrency or a digital token.”  On the other hand, the IRS has issued Notice 2014-21, identifying cryptocurrency as “property” for federal income tax purposes. Still a third possibility is that cryptocurrency, which can be used to purchase goods and services, is properly classified as money.

As the above demonstrates, the same word, or virtual product, can have different meanings depending on the context.  Here, we are considering how cryptocurrency is interpreted under an insurance policy.  There does not seem to be any reason why cryptocurrency must be treated as the same thing by the SEC, IRS and insurers.  Therefore, the pronouncements of the SEC or IRS should be only of limited assistance.

A common homeowners insurance policy states that the insurer will cover the loss of the insured’s dwelling, other structures, and personal property.  Crytocurrency is clearly not a dwelling or structure, so the question is whether cryptocurrency is “property” in the general sense because homeowners policies often protect against the loss of property.  Beyond the IRS guidance discussed above, there is authority for the position that cryptocurrency is property.  For example, an Ohio state trial court held that cryptocurrency was property covered by a homeowners policy.  That ruling is discussed further below.

Not all homeowners policies are the same

Even if cryptocurrency is property in a general way, however, the insurance analysis does not end there because not all property is treated equally under a homeowners policy.  For example, coverage for the loss of personal property often has a $200 sublimit for “money, bank notes, bullion, gold and [other precious metals], coins, medals, scrip, stored value cards and smart cards.”  Likewise, a homeowners policy may have a sublimit of $1,500 for “securities, accounts, deeds, letters, of credit, notes other than bank notes, . . . tickets and stamps.”  When considering these common sublimits, is it more appropriate to apply the $200 limit for money or the $1,500 limit for those items akin to securities?  At least for some cryptocurrencies, like Bitcoin, an analogy to money seems more appropriate because Bitcoin is specifically designed to be an alternative to traditional currency.  Considering an individual’s ownership of Bitcoin a security does not seem to make sense.  After all, when one thinks of a person owning a security, such as a share of stock in Acme Corp, the comparisons with Bitcoin are thin.

Beyond the issue of whether cryptocurrency is insured generic property, money, or a security, there is another fundamental issue to consider under a homeowners policy.  The insuring agreement in many homeowners policies states that personal property is insured for “direct physical loss to the property described” such loss from vandalism or theft.  Because cryptocurrency is a virtual currency, there is nothing to physically lose or destroy.  What is lost or destroyed is the record of ownership or the “key” to demonstrate ownership of the currency.  Cash can be burden by fire – not so for a currency that never exists physically.  A policyholder would have a difficult time explaining how the plain meaning of “direct physical loss” is met when the virtual currency is stolen.

A couple cautionary notes are required for this discussion.  First, not all homeowners policies are the same.  The terms and conditions of each policy will control; therefore, a generalized discussion about homeowners policies is just that – general.  For example, some policies treat money and securities the same, which could change or eliminate the need for the above analysis.

Is cryptocurrency considered property?

Second, individuals should not take too much comfort in the one reported decision on cryptocurrency as property under a homeowners policy.  In the Kimmelman v. Wayne Insurance Group decision from an Ohio trial court, the court ruled that cryptocurrency was generic property, not money, and the policy’s $200 sublimit did not apply.  Whether this decision is persuasive in other courts remains to be seen, but there are reasons why it should not.  The Ohio court did not provide a fulsome analysis of the issues, which limits its usefulness.  For example, there is no discussion on whether the policy’s submits for electronic funds or securities should apply.  In addition, the policy language is at issue in that it was drafted in 1999, years before cryptocurrencies were invented.  Newer policy language may not be the same.  Finally, the court relied heavily on the IRS guidance mentioned above, which states that cryptocurrencies are treated as property.  But that IRS guidance also states that cryptocurrency is treated as property “for income tax purposes.”  While IRS guidance on tax issues is persuasive, that guidance should have no impact on how insurance contracts should be interpreted.

The court was also persuaded that Bitcoin was general property, not money, because it could be exchanged for money, i.e. it is a convertible virtual currency.  But that rationale doesn’t explain that various forms of currency are converted to other kinds of currency all the time, e.g. Euros are converted into dollars.  Indeed, Bitcoin was originally conceived as a currency “akin to cash” by Satoshi Nakkamoto in his whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System.  And outlets such as the Wall Street Journal report Bitcoin value under “Currencies” with the Euro, U.S. Dollar, the Japanese Yen, etc., not under Stocks, Bonds or Commodities.  No one would argue that the Yen is not money but is property that can be converted into U.S. Dollars.

It also bears a mention that the focus on Bitcoin, even if the Ohio decision were correct, does not necessarily apply to other cryptocurrency platforms that have different purposes from Bitcoin.  For example, Ethereum was created for a different purpose from Bitcoin.  Ethereum, while it has a value associated with its coins/tokens, its original and fundamental purpose included providing a platform where one can build out new applications rather than simply being a substitute for traditional currency.  (For an explanation of the different types of cryptocurrencies, see this tutorial (last updated Jan. 2020)).  In all, I believe that Kimmelman was wrongly decided or, at least, of limited persuasive value that other courts should not find persuasive.

What Can Individuals Do?

The bottom line is that individuals should not rely on their homeowners policies to protect them from the loss of cryptocurrencies.  Commercial entities, in contrast, can buy crime policies or cyber insurance policies, which are largely unavailable to private individuals.  What can individuals do?  They must take proactive steps to protect themselves rather than relying on someone compensate them if their assets are lost or stolen.

For example, if an individual is using “hot” storage for their Bitcoin, i.e. having the virtual currency accessible online, the currency is vulnerable to theft by hacking or ransomware attack. The owner might consider, therefore, having a commercial third party hold the virtual token or coin in its digital wallet for the individual.  That commercial entity can be insured under a crime or cyber policy.  If the individual is using “cold” storage, e.g. storing the currency offline on a flash drive, the cold storage is vulnerable to physical destruction or old-fashioned theft.  In that case, the individual should secure the flash drive from theft and physical description by keeping it in a fire-proof safe.  Frankly, these are precautions that individuals should be taking even if the risk of loss were covered by a homeowners policy.  But, until coverage for cybercurrency for individuals is widely available under a homeowners policy, owners would be wise to take steps to protect their digital assets from bad actors and physical accidents.

Michael Menapace is a Non-Resident Scholar of the Insurance Information Institute, a partner at Wiggin and Dana LLP, and a professor of Insurance Law at the Quinnipiac University School of Law.

Emerging cyber terrorism threats and the Federal Terrorism Risk Insurance Act

Cyber is a relatively new, evolving risk. Insurers manage their exposures, in part, by setting coverage limits and excluding events they don’t want to insure.

On December 20, 2019, President Trump signed a federal funding package that includes a seven-year extension of the Terrorism Risk Insurance Act (TRIA). TRIA provides for a federal loss-sharing program for certain insured losses resulting from a certified act of terrorism.

Passage of the act was met with resounding approval by the insurance industry. You can read more about it here.

A critical mandate of the TRIA extension is for the Government Accountability Office (GAO) to make recommendations to Congress about how to amend the statute to address emerging cyberthreats. Triple-I recently hosted an exclusive members-only webinar featuring Jason Schupp of the Centers for Better Insurance, who discussed issues likely to be addressed by the GAO report.

Schupp said the report will likely serve as a starting point for a discussion about cyber threats and how the insurance industry can better meet the needs of businesses, nonprofits and local governments for cyber insurance. It will address:

  • Vulnerabilities and potential costs of cyber-attacks to the United States;
  • Whether adequate coverage is available for cyber terrorism;
  • Whether cyber terrorism coverage can be adequately priced by the private market;
  • Whether TRIA’s current structure is appropriate for cyber terrorism events; and
  • Recommendations on how Congress could amend TRIA to meet the next generation of cyber threats.

Cyber terrorism is already covered under TRIA, but such acts don’t fit neatly into the TRIA framework. Because cyber limits and conditions are already narrow, TRIA’s current make available requirement has not been effective in providing coverage for cyber-terrorism events at the same limits and conditions as non-cyber events.

Schupp proposes that the requirement be amended so the coverage doesn’t exclude insured losses specific to the loss of use, corruption or destruction of electronic data or the unauthorized disclosure of or access to nonpublic information.

But expanding the requirement carries considerable risk. If insurers are required to make more coverage available for cyber events than they are comfortable with the result could be a pullback in property and liability insurance generally – not just for cyber events. Any expansion must be balanced with the terms of the backstop.

Schupp concluded that the GAO’s investigation and report (which is required to be completed by June 2020) is likely to kick off a multi-year debate that could substantially redefine U.S. cyber insurance markets. Insurers, policyholders and other stakeholders should engage accordingly.

To learn about how to become a member of Triple-I visit iiimembership.org.

Ransomware payments doubled in fourth quarter 2019

The average ransomware payment increased by a whopping 104 percent in the fourth quarter of 2019, spiking to $84,116 from $41,198 in Q3, according to a report from Coveware, a security vendor.

Ransomware, also known as cyber extortion, involves the use of malicious software designed to block access to a computer system until a sum of money is paid. The 4Q increase reflects the diversity of the cyber criminals attacking companies.

Some ransomware variants are focusing on large companies where they can attempt to extort the organizations for seven-figure payouts. Small businesses, on the other hand, are bombarded with ransomware variants with demands as low as $1,500.

The total cost of a ransomware attack depends on its severity and duration and includes the costs of the ransom payment (if one is made), as well as remediation costs, lost revenue, and potential brand damage.

In Q4, ransomware actors also began exfiltrating data from victims and threatening to release it. In addition to remediation and containment costs, this complication adds to the potential costs of third-party claims.

Other key takeaways from the report include:

  • 98 percent of companies that paid the ransom received a working decryption tool in Q4 2019, unchanged from Q3.
  • Victims who paid for a decryptor successfully decrypted 97 percent of their data, a slight increase from Q3.
  • Average downtime increased to 16.2 days, from 12.1 days in Q3 of 2019. The was driven by a higher prevalence of attacks against larger enterprises, which often spend weeks fixing their systems.
  • Cyber criminals demand Bitcoin almost exclusively now in all forms of cyber extortion because it’s easier to swap extortion proceeds into a privacy coin after they collect, than to require a victim to purchase a less liquid type of digital currency.
  • Less sophisticated and well-financed attackers will target small companies with small IT budgets.
  • Public sector organizations continued to account for a high percentage of ransomware attacks in Q4. The attacks are expected to continue until these organizations are able to increase their security budgets.

 

JIF Insights: Cowbell CEO On Simplifying Cyber
For Smaller Firms

At Triple-I’s Joint Industry Forum last week, I had the opportunity to meet with Jack Kudale, CEO and founder of Cowbell Cyber, and learn more about how the startup aims to simplify and demystify cyber insurance for small and medium enterprises.

Cowbell CEO Jack Kudale’s background includes 25 years in enterprise software and five in cyber security. He led three startups before founding Cowbell.

Cyber remains a tough sell among smaller companies. As previously reported by Triple-I, many believe their risk profiles don’t warrant the cost of the coverage, and some complain the policies contain too many exclusions. A 2019 Advisen survey of brokers and underwriters – all involved in cyber insurance – found “not understanding exposures” (73 percent), “not understanding coverage” (63 percent), and “cost” (46 percent) to be the top three obstacles to writing and issuing cyber.

‘We eliminate the application’

Cowbell this morning announced the launch of Cowbell Prime 100 – the company’s A.I.-powered platform that promises to assess customers’ cyber exposures in real time and match them with the most relevant coverage for their business – all in about five minutes.

“Basically, we eliminate the application,” Kudale said. “The coverage is highly individualized for each specific business.“

And, if that isn’t enough, instead of an annual process of underwriting and renewal, Cowbell Prime 100 will continuously monitor customers’ exposures and recommend coverage changes in real time.

“For smaller companies, the concern is about speed and simplicity,” Kudale said. “Do I have to fill out long forms or answer intrusive questions? We remove all that friction and provide coverage tailored to their exposure.”

Larger companies, Kudale said, “are more interested in insights. Our continuous underwriting will help them better understand their cyber risks and how the recommended coverage addresses them.”

“The more customized the policy,” he continued, “the less concern there is about excessive exclusions.”

Cowbell Factors

The platform’s proprietary “Cowbell Factors” assess:

  • Projected loss costs based on hundreds of thousands of cyber cases,
  • Risk signals from internet-exposed infrastructure,
  • The customer’s cyber security practices,
  • “Dark web” intelligence,
  • Industry-specific business-interruption data, and
  • Regulatory compliance data.

Kudale’s background includes 25 years in enterprise software and five in cyber security. He led three startups before founding Cowbell with partners from the insurance and tech worlds.

Cowbell Prime 100 offers an A.M. Best ‘A’-rated admitted policy backed by Boost Insurance and prominent reinsurance partners, including Markel Global Reinsurance Company, Renaissance Re Holdings, and Nephila Capital. The company currently is appointing brokers and agents in California, Colorado, Arizona, Illinois, Oregon and Nevada.

Cyber Claims Get Paid; 
Why Do Many Businesses
Believe They Don’t?

There’s a road in my town that’s widely regarded as a speed trap. We all know drivers who say they were unfairly stopped and ticketed on it. I’ve never been and, come to think of it, neither has anyone I talk to about it.  Maybe it’s because we live in town and “everyone knows” about the trap.

Cyber is a relatively new, evolving risk. Insurers manage their exposures, in part, by setting coverage limits and excluding events they don’t want to insure.

Sure, people get ticketed. The road is straight and wide, and I guess some feel they should be able to drive faster than the clearly posted speed limit. Or maybe they think the “real” limit is somewhat north of the number posted.

Is that really a “speed trap”?

I think of this road when I hear people say they don’t buy cyber insurance because “everyone knows” cyber claims don’t get paid.

Poster child for “cyber” denial

The example on everyone’s lips when this topic comes up is Mondelez International, the food and beverage giant hit by the NotPetya ransomware attack in 2017. Mondelez incurred losses exceeding $100 million, and its insurer denied coverage based on a war exclusion.

The irony? The policy in question covered property, not cyber. One can argue – as Mondelez does in a lawsuit –  that the war exclusion is being unfairly applied, but businesses aren’t ceasing to buy property insurance on account of it!

Cyber claims data are hard to come by, but for nine years NetDiligence has published a Cyber Claims Study analyzing paid claims. The 2019 study looks at more than 2,000 such claims aggregated in over 20 ways, including types and amounts of losses, incident causes, data types exposed, business sectors affected, revenue size of claimants, and financial impact.

Verisk, whose cyber products help insurers write coverage based on their policyholders’ risk characteristics, doesn’t publish claims data but aggregates and incorporates them into its analytics.

NetDiligence publishes an annual Cyber Claims Study. Verisk aggregates and incorporates claims data into its analytics. Why do so many believe cyber claims don’t get paid?

Why the perception/reality gap?

Cyber is a relatively new, evolving risk. Insurers manage their exposures, in part, by setting coverage limits and excluding events they don’t want to insure. Indeed, in a recent survey by J.D. Power and the Insurance Information Institute, small-business owners named “too many exclusions” among the top reasons they don’t buy cyber coverage.

Claims are often denied because of exclusions policyholders might not have known about or understood. Some insurers, for example, include “failure to follow” exclusions for claims arising from inadequate security standards.

Everyone’s responsibility

If insurers want businesses to buy cyber policies and not be hit with unpleasant surprises at claims time, they need to be aggressively transparent about what’s included and excluded. Relegating this to fine print is not a good strategy.

Brokers and agents need to educate themselves about their clients’ needs and be fastidious in aligning coverage recommendations with those needs.

And insurance buyers – those with most at stake – need to understand cyber perils and insurance. For example, insurers require a cyber hygiene self-assessment from applicants. If, after an incident, that assessment proves inaccurate – say, if encryption practices were misrepresented – coverage can be denied.

Insurance isn’t a replacement for cyber diligence. But it can complement it as part of a well-planned risk management program.

Life & Death:
Cyberattacks Interrupt More Than Business

Cyberattacks on hospitals can lead to increased death rates among heart patients, recent research suggests. This research emerges as attacks on health facilities are reported to have increased 60 percent in 2019.

Researchers at Vanderbilt University‘s Owen Graduate School of Management drilled down into Department of Health and Human Services records on data breaches from more than 3,000 Medicare-certified hospitals. They found that, for facilities that experienced a breach, the time for suspected heart attack patients to receive an electrocardiogram (ECG) increased by more than two minutes.

Health care is the seventh-most targeted industry, but attacks on this sector are on the rise.

When seconds count

The study focused on the impact of remediation efforts on health care outcomes following a data breach.  It found that common remediation approaches, such as additional verification layers during system sign-on, can “delay the access to patient data and may lead to inefficiencies or delays in care.”

Common remediation approaches, such as additional verification during system sign-on, can delay access to patient data and lead to delays in care.

“Especially in the case of a patient with chest pain,” the report says, “any delay in registering the patient and accessing the patient’s record will lead to delay in ordering and executing an ECG.”

The researchers found that “a data breach was associated with a 2.7-minute increase in time to ECG three years after the breach.”

A bit over two minutes may not seem like much – but during a coronary or a stroke it can be the difference between life and death.

Increasingly targeted

Vanderbilt’s research was based on data collected before ransomware attacks against health care facilities became common. The authors caution that such attacks – in which systems or data are held hostage until a ransom can be paid – “are considered more disruptive to hospital operations than the breaches considered in this study.”

The medical sector is the seventh-most targeted industry, according to a report by internet security firm Malwarebytes, based on data gathered between October 2018 and September 2019. But Malwarebytes warns that attacks on this sector are on the rise.

“Threat detections have increased for this vertical,” the report says, “from about 14,000 healthcare-facing endpoint detections in Q2 2019 to more than 20,000 in Q3, a growth rate of 45 percent.”

Comparing all of 2018 against the first three quarters of 2019, Malwarebytes said it has observed a 60 percent increase in such attempted intrusions.

“If the trend continues,” Malwarebytes reports, “we expect to see even higher gains in a full year-over-year analysis.”

 

House Panel Approves Terrorism Insurance Backstop Reauthorization

“Ground Zero,Lower Manhattan,NYC.”

The House Financial Services Committee on October 31 approved an amended version of the Terrorism Risk Insurance Program Reauthorization Act of 2019 that would require the Government Accountability Office (GAO) to report on cyberterrorism risks and the Department of Treasury to issue a biennial report that includes “disaggregated data on places of worship.”

The Terrorism Risk Insurance Act of 2002 (TRIA), approved after the 9/11 terrorist attacks in New York City and Washington, D.C., provided a backstop to encourage insurers to resume writing terrorism policies. After 9/11, primary insurers sought to explicitly exclude terrorism coverage from their commercial policies, and reinsurers became unwilling to assume risks in urban areas perceived as vulnerable to attack.

TRIA created the Terrorism Risk Insurance Program (TRIP), a federal loss-sharing program for certain insured losses resulting from a certified act of terrorism. TRIP provides a backstop for insurers and has to be periodically reauthorized. It is currently due to expire at the end of 2020.

In addition to the reporting requirements mentioned above, the amended legislation shortens the extension period from 10 years.

The bill says the cyber report should analyze the general vulnerabilities and potential costs of cyberattacks on the nation’s infrastructure and reach conclusions about whether cyberrisk, particularly cyberliabilities, under property/casualty insurance, can be sufficiently covered and adequately priced.

The insurance industry has praised the progress of the extension as well as the proposed studies of cyber exposures. The next step toward TRIA reauthorization is a floor vote in the House of Representatives.

Follow the conversation about the federal terrorism backstop here.

Are Cyberrisk Insurers This Decade’s Mortgage-Securities Investors?

An awkward moment during  Advisen’s Cyber Risk Insights 2019 conference last week:

Are cyber insurers falling down on the job, as many say lenders, regulators, and rating agencies did before the 2008 financial crisis?

Panelists recalled how, in the early days of cyber, insurers often sought more information to write policies than clients could (or wanted to) provide. So, they started asking for less.

Most attendees remembered the “old days.” Many nodded. They understood.

The awkwardness came when one audience member observed that insurers “still chase market share” despite lacking complete policyholder risk information. “That sounds a lot like mortgage-backed securities before the financial crisis!”

Are cyber insurers falling down on the job, as many say lenders, regulators, rating agencies, and investors did before the 2008 financial crisis and subsequent recession?

The analogy may sound fair, but it falls apart on examination.

Mortgages and the financial crisis

In the early 2000s, it was easy to get a mortgage. Lenders would bundle loans to be sold as mortgage-backed securities. The theory: Few people would stop making payments and risk losing their homes. The rest would pay, and the security would deliver a fair return.

This made sense when lenders did their job. But too many abandoned their standards. Because they could sell them, lenders had no stake in whether the mortgages were paid.

Regulators and rating agencies, it has been argued, didn’t ask enough questions about the securities the loans supported. This gave investors more confidence than the investments warranted. When loans that should never have been made in the first place defaulted, the resulting dislocation of the homebuying and financial markets ushered in the Great Recession.

Where the analogy breaks down

Cyber insurers understand the risks they’re taking and price their policies accordingly. In fact, a recent I.I.I./J.D. Power survey found two of the top four reasons small companies choose not to buy cyber coverage are that it costs too much and contains too many exclusions.

Unlike the lenders and borrowers and investment banks in the early oughts, insurers have skin in the game. If they write bad business, they can’t simply pass it along to some naïve investor.

They also have a stake in customer relationships. They aren’t pushing policies, pricing them to sell, and hoping for the best. They’re working with clients to understand and address the clients’ vulnerabilities.

Cyber insurers understand the risks they’re taking and price their policies accordingly…. They also have a stake in customer relationships.

Seventy percent of small companies that bought cyber said their insurer helps with risk mitigation (up from 65 percent last year), according to the I.I.I./J.D. Power survey.  At the Advisen event, I heard insurers and policyholders discussing how they can address these perils. Policyholders clearly wanted insurers to do more than write policies and pay claims, and the insurers were listening.

Conversations like these, and the spirit of transparency and shared responsibility they reflect and promote, are essential to staving off and mitigating the impact of cyberattacks. Insurers and insureds, together, are visibly seeking solutions to a real and growing problem.

The people behind the financial crisis quietly created problems in pursuit of opportunities, studiously unmindful of the collateral damage they were generating.