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Eric Nordman
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Last Updated 10/31/17

Issue: Cybersecurity risks have become more significant as critical consumer financial and health information is increasingly stored in electronic form. As people become more reliant on electronic communication, and as businesses collect and maintain ever more granular pieces of information on their customers, the opportunity for bad actors to cause difficulties for businesses and the public is exploding. Recent high-profile data breaches have led regulators to work toward strengthening insurer defenses against attacks.

In late 2014, the NAIC Executive (EX) Committee appointed the Cybersecurity (EX) Working Group to serve as the central focus for insurance regulatory activities related to cybersecurity. State insurance regulators are committed to developing tools to ensure effective regulation to protect consumers. The NAIC recently adopted an Insurance Data Model Security Law which creates rules for insurers, agents and other licensed entities covering data security, investigation and notification of breach. This includes maintaining an information security program based on ongoing risk assessment, overseeing third-party service providers, investigating data breaches and notifying regulators of a cybersecurity event. The NAIC has already developed a Roadmap for Cybersecurity Consumer Protections and Principles for Effective Cybersecurity: Insurance Regulation Guidance. These documents served as the chassis for building the Insurance Data Security Model Law.

Cyber Risk Management

In recent years, the demand for cyber insurance has increased significantly in response to sharply heightened risk awareness. However, managing cyber risks through insurance is relatively new. Although the market for cyber liability insurance is off to a good start, it is expected to grow dramatically over time as businesses gradually become more aware that current policies do not adequately cover cyber risks. With each announcement of a system failure leading to a significant business loss, the awareness grows. This growing awareness has stimulated demand for cyber liability insurance products.

As data breaches occur more frequently, there are additional pressures for business to step up efforts to protect the personal information in their possession. Cyber-attacks may come from nation states, terrorists, criminals, activists, external opportunists and company insiders (both intentional and unintentional). Cybercriminals attack to gain some type of political, military or economic advantage. They usually steal money or information that can eventually be monetized, such as credit card numbers, health records, personal identification information and tax returns.

Cyber risks include:

  • Identity theft as a result of security breaches where sensitive information is stolen by a hacker or inadvertently disclosed, including such data elements as Social Security numbers, credit card numbers, employee identification numbers, drivers’ license numbers, birth dates and PIN numbers.
  • Business interruption from a hacker shutting down a network.
  • Damage to the firm’s reputation.
  • Costs associated with damage to data records caused by a hacker.
  • Theft of valuable digital assets, including customer lists, business trade secrets and other similar electronic business assets.
  • Introduction of malware, worms and other malicious computer code.
  • Human error leading to inadvertent disclosure of sensitive information, such as an email from an employee to unintended recipients containing sensitive business information or personal identifying information.
  • The cost of credit monitoring services for people impacted by a security breach.
  • Lawsuits alleging trademark or copyright infringement.

Cyber Liability Policies

Most businesses are familiar with their commercial insurance policies providing general liability coverage to protect the business from injury or property damage. However, most standard commercial lines policies do not cover many of the cyber risks mentioned above. To cover these unique cyber risks through insurance requires the purchase of a special cyber liability policy. However, cyber risk remains difficult for insurance underwriters to quantify due in large part to a lack of actuarial data. Insurers compensate by relying on qualitative assessments of an applicant’s risk management procedures and risk culture. As a result, policies for cyber risk are more customized than other risk insurers taken on, and, therefore, more costly. The type of business operation will dictate the type and cost of cyber liability coverage. The size and scope of the business will play a role in coverage needs and pricing, as will the number of customers, the presence on the Web, the type of data collected and stored, and other factors.

Cyber liability policies might include one or more of the following types of coverage:

  • Liability for security or privacy breaches. This would include loss of confidential information by allowing, or failing to prevent, unauthorized access to computer systems.
  • The costs associated with a privacy breach, such as consumer notification, customer support and costs of providing credit monitoring services to affected consumers.
  • The costs associated with restoring, updating or replacing business assets stored electronically.
  • Business interruption and extra expense related to a security or privacy breach.
  • Liability associated with libel, slander, copyright infringement, product disparagement or reputational damage to others when the allegations involve a business website, social media or print media.
  • Expenses related to cyber extortion or cyber terrorism.
  • Coverage for expenses related to regulatory compliance for billing errors, physician self-referral proceedings and Emergency Medical Treatment and Active Labor Act proceedings.

Securing a cyber-liability policy will not be a simple task. Insurers writing this coverage will be interested in the risk-management techniques applied by the business to protect its network and its assets. The insurer will probably want to see the business’ disaster response plan and evaluate it with respect to the business’ risk management of its networks, its website, its physical assets and its intellectual property. The insurer will most likely be keenly interested in how employees and others are able to access data systems. At a minimum, the insurer will probably want to know about antivirus and anti-malware software, the frequency of updates and the performance of firewalls.

Status: The NAIC and state insurance regulators  have made significant progress on their efforts to tackle cybersecurity issues. The Cybersecurity (EX) Task Force adopted the Principles for Effective Cybersecurity Insurance Regulatory Guidance in April 2015. The 12 principles adopted direct insurers, producers, and other regulated entities to join forces in identifying risks and adopting practical solutions to protect information entrusted to them. Additionally, the NAIC is developing new reporting requirements for insurers to better track cyber insurance policies issued in the marketplace.

The NAIC is moving forward with additional initiatives designed to help protect consumer information and educate the public about cyber risks. The Cybersecurity (EX) Working Group worked extensively to develop a Cybersecurity Consumer Bill of Rights detailing what consumers can expect from insurance companies, agents and other businesses following a data breach. After extensive review and discussion, the Bill of Rights was adopted by the NAIC Executive (EX) Committee and Plenary on Dec. 17, 2015 and the title amended the “NAIC Roadmap for Cybersecurity Consumer Protections .” In addition, on October 24th, 2017, the NAIC adopted the Insurance Data Security Model Law during a joint meeting of the Executive (EX) Committee and Plenary. The Insurance Data Security Model Law establishes the standards for data security and investigation and notification of a breach of data security applicable to insurance providers. The NAIC also updated its Financial Condition Examiners Handbook and will be updating the Market Regulation Handbook.

The Cybersecurity (EX) Working Group also worked with the Property and Casualty Insurance (C) Committee and the Financial Condition (E) Committee to develop the Cybersecurity and Identity Theft Insurance Coverage Supplement for insurer financial statements to gather financial performance information about insurers writing cyber-liability coverage nationwide. The first year the Supplement was required to be filed was with the 2015 Annual Statement filed in April of 2016. This year insurers reported information on the 2016 calendar results. More than 500 insurers have provided businesses and individuals with cybersecurity insurance, with the 75% of the insurers writing cybersecurity insurance as part of a package policy. An overview shows a cybersecurity insurance market of roughly $1.8 billion in direct written premium for insurers required to file the Supplement. Insurers writing standalone cybersecurity insurance products reported approximately $921 million in direct written premium and those writing cybersecurity insurance as part of a package policy reported roughly $864 million in premium writings. .

Lastly, the NAIC and Stanford Cyber Initiative recently hosted a joint cybersecurity forum to provide insight into current cyber threats and the role insurance plays in mitigating risks. The forum, held during National Cybersecurity Awareness Month, featured a keynote from Richard A. Clarke, former U.S. National Coordinator for Security, Infrastructure Protection and Counter-Terrorism. Clarke's address was accompanied by panels focusing on understanding cyber risks, the range of cyber threat scenarios and identifying potential gaps in cyber insurance coverage and risks. A video replay of the event is coming soon.