Cyber Insurance

When most people think of cybersecurity, they think of IT departments protecting corporate networks, or individuals at home on their personal computers. But cybersecurity is differentiating rapidly as more people realize its actual goal is to improve the reliability of some other business process or product, and not an end in itself. Since these business processes vary widely from one industry to another it makes sense to talk about the unique issues and approaches faced by individual market verticals. One such vertical: Cyber Insurance.AOL Fishbowl

The October 1 edition of the excellent Security Leaders dinner series conducted by @mach37cyber, cohosted by Mach37, AOL, and Marsh & Mclennan at the AOL Fishbowl, was a highly interactive, highly informative panel discussion with insurance industry and related legal professionals on the topic of Cyber Insurance. Cyber Insurance is designed to cover some of the costs in the aftermath of a cybersecurity incident, including items such as forensics to determine what happened and the extent of the damage, public relations to communicate with customers and other stakeholders, costs such as credit monitoring involved in the remediation, and legal costs for defending lawsuits that arise as a result of a breach or loss of data. These costs for businesses that experience a cyber incident continue to increase rapidly.

It is clear that cyber insurance is still a very nascent but rapidly growing industry that faces some difficult challenges. Unlike more familiar life insurance, car insurance or hazard insurance, there is no long claims history to determine actuarial risk. There is no agreed set of standards or guidelines, analogous to “stop smoking”, that are guaranteed to reduce risk for most customers. Every insurance need is essentially custom to the situation (the panelists all agreed businesses should pay attention to coverages and exclusions such as “acts of war”), with businesses handling health information or PII facing very different imperatives than those handling primarily credit card or other financial transactions. And the way that business is conducted, with online brokers promising several competitive quotes within a few hours, means that the due diligence to determine a business cyber posture or even whether they are already breached when the policy is written, is not practical. The remedy for the latter is an increasing reliance on third-party audits or certifications regarding the business practices of businesses seeking insurance.

Cyber Ins panelInsurance claims start when an insured business has knowledge that something has happened, so for data breaches this means the company must be at least sophisticated enough to know that something is wrong. But as one panelist indicated, the most commonly reported incident is “hack” (not a very sophisticated description) counting for about 1/3, while lost laptops and even lost paper still account for significant portions of claims. The insurance company can help bring in forensics and other experts to determine the extent of losses and help stop further losses, and then supports later steps in the remediation and recovery process.

In discussions after the panel, a couple interesting questions came up. First, is cyber insurance more like car insurance (where different skill levels are reflected in different accident rates, allowing lower premiums for good drivers) or more like life insurance (where every insured person experiences exactly one death and premiums are essentially financing the cost of activities around dying, requiring higher premiums for those with a shorter expected time period to do the financing)? Ideally this would look more like car insurance, with a set of specific steps to reduce chances of an accident, but most people seemed to believe it is currently more like life insurance, financing for that first event after which businesses take more extensive steps on their own to prevent a recurrence.

A second interesting question was whether people in the crowd would want to be in this insurance business (an admittedly skewed sample, since the audience was mostly techies). The large majority of people I spoke with said “no”, since it seems almost the luck of the draw which companies will survive in the market; if your business base doesn’t experience many costly claims then you’re probably ok, but the market dynamics make that extremely difficult to determine.

The third interesting post-panel question revolved around the asymmetry in risk and damage in this ecosystem as a whole. The best example here is the loss of PII from a business with cyber insurance. While a business with poor cybersecurity practices certainly incurs costs related to a breach, the harm also falls extensively on the individuals whose PII has been compromised. But the harm to the business is mitigated by the insurance, while the harm to individuals is less well covered (hence, lawsuits). Credit monitoring is sort of like jail time…once you reach three or four life sentences, adding additional coverage doesn’t really help very much. One could hope the cyber insurance industry is taking steps to help mitigate risks for businesses seeking good practices, while not protecting businesses who seek only to profit at individual expense.

Finally, there are a variety of interesting conclusions for early stage companies looking to sell cybersecurity products to businesses in the age of cyber insurance. For entrepreneurs involved with forensics or risk management, it may be that the insurers are your primary market rather than companies directly. In the era of risk management, businesses are no longer seeking to drive their risk to zero. Instead this becomes a cost tradeoff; at what point does additional technology cost more than the insurance to protect the same level of risk. For a cybersecurity vendor not only are you competing with other equivalent vendors for a share of the fixed security pie, now you are competing with a range of alternatives some of which are not even technology-based.

Cybersecurity insurance will continue to grow as a dynamic force in this market. It is unclear exactly how those dynamics will evolve however, so prudent companies should continue to watch this industry vertical carefully.