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Over three weeks in 2013, cyber-criminals siphoned consumer data from Target, stealing more than 110 million records and causing at least $260 million in damages to the retail giant. A months-long breach at Home Depot, disclosed in September 2014, resulted in the leak of information on 56 million credit and debit cards and 53 million email addresses and at least $70 million in damages to date. And in February 2015, health insurer Anthem acknowledged that nearly 79 million people had their personal records stolen, including their medical IDs and Social Security numbers.
Such massive breaches are the best advertising for cyber-insurance, convincing many companies—especially in the retail and health care industries—to consider policies. Yet, for insurers, the significant losses caused by hackers are quickly taking the shine off underwriting cyber policies, particularly for the largest companies.
The business of insurance is much like regulated gambling—the house is used to winning and hates to lose, Julian Waits, CEO of risk-management firm PivotPoint, told eWEEK.
“Insurers are like casinos because the house normally wins,” he said. “But in cyber, the house is not winning, and that means they are looking at their business.”
As demand heats up for offsetting cyber-risk, massive breaches are causing insurance firms to question the underwriting some of the largest companies because any breach of such large companies can result in massive damages. Target, for example, estimates its losses from the 2013 breach will exceed $250 million, with only $90 million covered by insurance. The company had to work with several insurers to build a policy with such a high payout. Called a “tower” in the insurance industry, such techniques are in more demand than ever. Home Depot, for example, had a similar $100 million policy, which—so far—has paid $30 million toward the home-improvement retailer’s losses.
The catastrophic breaches are causing policy premiums to rise substantially for larger companies, Robert Rosenzweig, national cyber-risk practice leader for Risk Strategies Company, an insurance brokerage. Some reported estimates put the year-over-year increase at more than 30 percent.
“The pricing for the Fortune 1000 is going up, and it should go up because that is where the largest catastrophic breaches have happened,” he said. “The carriers are losing profits on those policies, and they have to re-price their risk.”
Yet, at the same time, policies for midsize companies seem reasonably priced, and at the low end, among small and midsize businesses (SMBs), cyber-insurance is a commodity market, Rosenzweig said.
“My feelings are to a certain extent [the concern over policy increases] is a little bit alarmist,” he said. “The SMB marketplace is very much commoditized. The attitude of insurers is to put as much of it on the books as they can.”
A number of technology providers are aiming to find better ways to help businesses and insurers gauge risk. Security-metrics firm BitSight, for example, uses external evidence of compromise—such as corporate IP addresses that show signs of bot infection—to assign a relative score to a company’s apparent security. In recently released research, the company found that the highest-scoring firms had the smallest risk of a breach over the past two years, with only 1.25 percent publicly disclosing a breach. The lowest-scoring firms had a four times greater chance of having a breach in the past two years.
Demand for Cyber-Insurance Rises, but Insurers Worry
“The market needs objective assessments and objective understandings of the risk,” Ira Scharf, general manager of worldwide cyber-insurance for BitSight, told eWEEK. “Most of the current assessments are being done by surveys and manual processes.”
Other technology startups seek to demonstrate to firms and insurers where a breach could do the greatest damage. PivotPoint, for example, looks at a company’s business—the assets on which it relies and its security posture—and runs hundreds of thousands of automated simulations to determine the dollar value that is at risk from a breach.
“The insurance industry loves to say there is not enough data,” said CEO Waits. “I don’t think that is true.”
Part of the problem, however, is that most insurance models treat attacks like random events. Many insurance firms look at breach insurance in the same way as accounting for the risk of a hurricane. Instead, they need to account for the adversary behind the attack. Even the most secure business can be breached. While better preparation will generally minimize the impact of a random disaster, if a company is targeted, it may not matter how well they are prepared.
“If you are going to model cyber-risk on anything, you have to model it based on major cyber-events that have happened in the world,” Waits said. “This is a social science. It is not about hurricanes—it is about what people do when they do bad things.”
The insurance market is still in its infancy, and it will take years for the industry to get a good handle on the problems of dealing with an intelligent attacker, he said. “We are still years behind the bad guys,” Waits said. The Internet was never designed to be secure; it was designed to be a free and open platform.”
Until companies are able to manage their risk better and insurance firms can more accurately gauge risk, businesses will have to account for uncertainty and the insurance market will have to continue pricing such uncertainty into its premiums.