Companies embrace technology even more than usual whenever there is an information age. Everything happens digitally, from managing confidential customer data to running regularly. Yet this dependence on technology makes companies vulnerable to growing cyber risks. Cyberattacks (ransomware, data breaches, and phishing) are more frequent and more advanced in businesses with significant risks of financial losses. To address these growing risks, cyber insurance has become a critical component for minimizing the financial impact resulting from cyber incidents. But how do companies quantify cyber risk and transfer that risk through insurance? This extensive paper discusses the quantification of cyber risk, the types of cyber insurance, and the means by which to optimally transfer the risk to insurers.
With the increase in cyberattacks, organizations have been challenged to revisit their risk mitigation approaches. Examples of cyber incidents include:
- Loss of data
- Loss of system operation time.
- Reputational damage to the company.
- Litigation effects
IBM’s Cost of a Data Breach Report estimated the average data breach cost this year at about $4.45 million, and it is projected to continue rising.
Every organization has to make a tradeoff between acquiring security tools and preparing for the worst, which is bad luck so that it succeeds in a cyber attack. This is the stage at which cyber insurance can be a valuable tool for handling and shifting financial risks arising from cyber events. This paper outlines the major aspects of cyber insurance, how corporations can value cyber risk, and ways to transfer that risk smoothly.
What is Cyber Risk?
Cyber risk refers to the potential for financial loss, disruption, or damage resulting from information systems failure or a cyberattack. These risks affect organizations of all sizes and sectors, ranging from small businesses to large enterprises, particularly those handling sensitive data.
Types of Cyber Risks
Understanding the various cyber risk profiles is a necessary first step in understanding how to avoid and transfer cyber risk. Key cyber risks include:
- Data Breaches are the unauthorized use or acquisition of private information (e.g., customer data, financial information, or intellectual property).
- Ransomware Attacks: Software malicious that encrypts data and requires payment of ransom.
- Phishing and Social Engineering are strategies for preying on employees’ trust in an employer’s confidential information, which is frequently followed by a security breach.
- Denial of Service (DoS) Attacks: Meltdown of systems more than they can be shown to be unusable, leading to business failures.
- Business Email Compromise (BEC): Deceptive phishing email campaigns target businesses to induce them to transfer funds or reveal confidential information.
Quantifying Cyber Risk
Cyber risk quantification requires estimating the chance of a cyber event and the damage (financial loss) that the event poses to the company. In this phase, it is of significant value to determine to what extent the organization needs its coverage, and the insurance policy must reflect the company’s risk profile.
1. Asset Identification
Quantifying cyber risk begins with identifying the enterprise’s critical assets. These include data, IT infrastructure, intellectual property, customer data, and all the other digital assets necessary for the business’s operation.
2. Assessing Vulnerabilities
After critical assets are identified, the next step is determining their fragilities. This involves evaluating:
- Software and hardware vulnerabilities
- Inadequate security policies
- Insider threats (either intentional or accidental)
- Misconfigurations or outdated systems
Along the way, a vulnerability assessment may provide a view of the weaknesses in the organization’s security posture and thus serve as a model for measuring cyber risk.
3. Measuring the Likelihood of an Attack
The incidence risk of a cyber attack incident varies according to industry, geographical location, and company size. Factors that influence this likelihood include:
- Historical attack data (frequency of past breaches)
- Industry-specific weaknesses (e.g., healthcare, finance, etc., are common targets).
- Security status (e.g., whether the organization has good (robust) or bad (weak) cybersecurity controls).
- Public visibility (high-profile companies are more attractive targets)
In addition, an estimate of the probability of an attack helps enterprises evaluate the degree of risk they face and plan accordingly.
4. Estimating Potential Impact
The exact impact of a cyberattack can range from discreet annoyances to catastrophic economic consequences. To estimate the potential financial impact, organizations should consider:
- Revenue Loss: Time out of service due to attacks can interrupt operations, leading to revenue loss or service delays.
- Reputation Damage: Breach of trust may result in customer attrition and consequential revenue loss.
- Legal and Regulatory Fines: Different industries are subject to data protection legislation (e.g., GDPR), which carries a risk of substantial financial fines for data breaches.
- Recovery Costs: These costs involve, for example, system recovery, forensic investigations, legal fees, and compensation to customers.
5. Using Cyber Risk Models
Several cyber risk modeling tools are available to help organizations quantify cyber risk. Such models forecast not only the probability but also the effect of cyberattacks on the basis of historical data and statistical inference. Common models include:
- Factor Analysis of Information Risk (FAIR): A risk framework that assesses risk by decomposing it into four components: loss event occurrence, threat event occurrence, vulnerability, and consequence.
- Cyber VaR (Value at Risk): This model predicts the financial effect of cyber risk based on historical data and stress testing.
These models can enable companies to see and quantify the costs that various cyber threats may incur and decide what costs to insure under cyber insurance.
Cyber Insurance: What it Covers
Once an organization has assessed its cyber risk, it would then proceed to transfer that cyber risk in the form of cyber insurance. Cyber insurance policies usually cover first- and third-party losses, targeting different aspects of cyber events.
1. First-Party Coverage
Direct-cost or first-party coverage covers expenses that can be directly linked to the insured organization as a direct result of a cyber incident.
Common types of first-party coverage include:
- Business Interruption: Covers business interruption losses incurred as a direct consequence of a cyberattack, including lost profits.
- Data Restoration: This covers the cost of restoring data that has been corrupted, deleted, or held ransom.
- Incident Response: This area deals with the costs associated with incident management, including the cost of procuring cybersecurity professionals, engaging in forensic investigations, and planning and running communications.
- Ransom Payments: This includes ransomware payment in case of a ransomware attack (but such cost may be subject to manipulation according to policy).
2. Third-Party Coverage
Third-party coverage relates to indemnification against cyberattack liability and financial damage caused by a cyberattack that affects third parties (i.e., customers/other partners/vendors). Key areas of third-party coverage include:
- Legal Defense and Settlements: Especially in terms of legal fees, settlements, and judgments that result from litigations against injured third parties (e.g., customers whose data was stolen).
- Regulatory Fines and Penalties: This section concentrates on the penalties assessed by a regulatory body when a company fails to adequately protect personal information or meet a regulatory requirement.
- Media Liability covers, for example, allegations of defamation or intellectual property rights violations concerning online leakage/breach of information.
The Process of Transferring Cyber Risk
After a company considers its risk exposure, it can consider how to transfer that risk through cyber insurance policies. The following outline describes how cyber risk may be successfully transferred.
1. Identifying Coverage Needs
Organizations should carefully assess their risk profile to understand exactly what level of protection (whether in person, over the phone, etc.) is necessary. For instance, companies that handle confidential customer data might prioritize data breach coverage, and those that operate industrial technology might prioritize business disruption coverage.
2. Understanding Policy Exclusions
Cyber insurance policies include exclusions, which are particular types of events and costs that the insurer will not cover. Common exclusions include:
- Acts of War or Terrorism: Many policies exclude cyberattacks associated with warfare or terrorism.
- Insider Threats: Policies potentially do not extend to damage caused by malicious insiders unless explicitly provided.
- Pre-existing vulnerabilities: Not all policies can cover attacks because information about vulnerabilities that are publicly known but never patched is not always available.
Interpreting these exclusions is critical to ensure the policy accurately represents the organization’s risk profile.
3. Negotiating Policy Terms
Cyber insurance is configurable to the organization’s requirements but involves intensive negotiation. Factors to consider when negotiating policy terms include:
- Coverage Limits: Specifically, to assure that the policy would provide sufficient monetary protection for the highest risk scenarios.
- Deductibles: There will be careful maintenance of low premiums and reasonable deductibles that won’t push the institution into a claim) to the limit.
- Retroactive Coverage: The ability to get coverage for events that happened before the policy came into effect, even though these events may not have been identified until after they happened.
4. Coordinating with Cybersecurity Programs
Nevertheless, this does not mean that cyber insurance should replace security practices. Rather, it should be incorporated into a more encompassing cybersecurity plan. Insurers frequently mandate organizations maintain a basic set of cybersecurity controls, like encryption, firewalls, and (periodic) software updates, to be covered.
Several insurers provide risk mitigation services such as periodic security surveys, periodic employee training exercises, and incident response exercise execution to help entities minimize their vulnerability to cyber-attacks.
Quick Read: 10 Quick Wins to Reduce Your Cyber Risk for Your Organization
ReliQ from Mitigata: A Proactive Approach to Cyber Risk Management
In addition to standard cybersecurity controls and insurance, corporations like Mitigata offer products such as ReliQ (Risk Evaluation and Liability Quantification). ReliQ is an environment for the early identification, management, and reduction of cyber risk.
It allows enterprises to detect weaknesses, assess possible risks, and compute the monetary results of cyber attacks before they are realized.
ReliQ is built upon a data-driven approach, which integrates real-time threat intelligence and historical data to perform risk quality assessment. This proactive approach allows organizations to become informed about their risk exposure and make more intelligent decisions about the amount of insurance coverage that they may need.
ReliQ also offers ongoing risk management tools, such as vulnerability tracking and assessment, to ensure that businesses continually improve their security posture and reduce potential liabilities. For example, by deploying ReliQ, companies can adopt a more resilient, agile, and systemic approach to cyber risk management underpinned by and in support of their respective insurance regimes.
Challenges in Cyber Insurance
Despite its benefits, cyber insurance has challenges. Companies must be aware of some difficulties associated with buying and implementing cyber insurance products.
- Pricing Complexity
Cyber insurance pricing can be highly complex. Premiums are also influenced by a large number of variables, including an entity’s size, sector, risk profile, and the likelihood of being a victim of a cyber event. As cyber threats evolve, a risk insurer might either raise the premiums or adjust the coverage limits, which can be very hard for businesses to sustain at an economically viable scale.
- Rapidly Evolving Threat Landscape
The cyber threat landscape is constantly evolving. Unforeseen attack surfaces, such as a zero-day vulnerability or a supply chain attack, may appear as a surprise. Insurance coverage may not always be in step with such developments, putting organizations at risk from unforeseen threats to their protection.
Conclusion
Cyber insurance has developed into an essential risk management resource for organizations to mitigate the financial risks of cyber attacks. Organizations must accurately evaluate cyber risks to determine the coverage needed for effective protection against various cyber threats.
Transferring cyber risk through insurance should be part of a comprehensive risk management strategy, complementing robust cybersecurity controls. Proactively, companies can protect their digital and financial assets and build resistance to the moving cyber threats they continue to encounter.
Mitigata Cyber Insurance moves this further, providing a proactive, data-driven view of cyber risk management. Using tools like ReliQ and Mitigata, Mitigata helps companies understand and control risks and tailor their insurance coverages, which are also adjusted according to the changing threat landscape. Through brilliant risk analysis and complete coverage, Mitigata enables businesses to develop cyber resilience and protect their future.
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