07 September 2014

Cyber Insurance: The Future of Enterprise Risk Management...

There has been great debate over the years on the topic of cyber security insurance to complement a comprehensive Operational Risk Management (ORM) strategy.  Does the existence of a robust Enterprise Risk Management (ERM) program that includes substantial components of Operational Risk benefit the organization in the eyes of the insurer?

Could the Cyber Insurance industry be heading towards a future model for making the case for "Enterprise Risk Management" in the Cyber Risk Space?  As a parallel example, the banking industry requires homeowners insurance before loans are approved.  This is because there are a hundred plus years of history on fires as a potential threat and the actuaries know the odds for a loss event, especially with the new building materials and the rules on sprinkler systems in certain areas.

We are getting close to the point where data analytics and the history of cyber attack information will be used to assist insurers in writing a "Cyber Risk policy" based upon your industry sector and geographic location. The data being analyzed now on the banking sector and energy sector is vast and these are just two critical infrastructure sectors that have a long history of being attacked by criminal network bots and also nation states, on an hourly basis.

The U.S. Department of Homeland Security (DHS) has been looking into the multi-factors surrounding Enterprise Risk Management in the context of cyber insurance for the past few years:
Based on what it had learned, NPPD hosted an insurance industry working session in April 2014 to assess three areas where it appeared progress could lead to a more robust first-party market: the creation of an anonymized cyber incident data repository; enhanced cyber incident consequence analytics; and enterprise risk management evangelization.
The evangelization of ERM is vital not only for those Global 500 organizations but also for the INC. 500.  The companies that are the supply chain to the enterprise are even more at risk of attack since they provide an on-ramp for modern malware to seek new vulnerabilities.  These supply chain companies will soon be asked about their Enterprise Risk Management (ERM) program strategies and for good reason.

In order for the Global 500 to continue to have confidence in a robust ERM strategy, they must have ways to validate their own supply chain organizations maturity in the cyber risk management domain. So what did the participants in the DHS NPPD cyber insurance roundtable in 2014 recommend as elements of a successful ERM program?
Engagement of senior leadership. A reinsurer commented that effective ERM programs must be implemented at the senior leadership level. Specifically, he advised that they should reflect a corporate culture that features cyber-related ERM discussions at all board meetings and that subjects itself to regular oversight – including through periodic internal risk audits and audits by outside, independent organizations.
Engagement of general counsels. A broker described general counsels and chief compliance officers as key players in successful ERM programs and stated that her company’s risk assessment workshops for corporate leaders are always more successful when these leaders are involved.
Engagement of CISOs. An underwriter added that it is similarly valuable to include a company’s CISO in the ERM process – particularly a CISO who understands the role that insurance can play as part of a comprehensive risk management strategy.
Establishing direct lines of communication. A third underwriter asserted that when it comes to cyber security specifically, a company should establish a direct line for ERM reporting to its board of directors rather than a hierarchal chain that requires many approvals before funds can be spent on someone (e.g., outside cyber forensics support) or something (e.g., a new technology) to address a cyber risk or incident.
So what does all this mean, if my INC. 500 company is part of the supply chain of a Global 500 organization?

It means that your ERM program will be under the magnifying glass if not now, very soon.  If you are considered to be a vital supplier to the Global 500 enterprise, then you most likely are cyber-connected for data exchange or even more.  The digital systems level decisions and the speed of business require that you have cyber data handshakes every few minutes or seconds.  The ability for your product or service to perform, requires this high degree of "Trust Decisions."

The time has come for Cyber Risk insurance to mature and to become another standard component in the Operational Risk Management (ORM) portfolio.  We look forward to seeing the language of the policies themselves as they evolve.  Will attribution of the origin of the cyber attack be a factor in a first-party coverage claim?  We think you can count on it...

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