A Beginner's Guide to Cyber Insurance & Risk Management

Feb 8, 2023 Insurance, Insurtech

A Beginner's Guide to Cyber Insurance & Risk Management

Cyber insurance and risk management are critical for businesses in this age of digitalization.

The cyber threat landscape is rapidly changing and presents an ever-growing challenge to mitigate risks with the right coverage. The complexity of the threat landscape continues to grow as new attack strategies are identified with alarming regularity. 

In this guide, we will cover all the basics of cyber insurance and risk management to help agents and brokers better advise customers on which policies meet their requirements — taking them beyond just protecting their data and setting up systems that reduce or eliminate risks before they happen.

What is a Cyber Insurance Policy?

A cyber insurance policy is an important tool for any business. It provides financial protection from data breaches, cyber-attacks, privacy violations, and other cyber-related losses. The policy helps businesses identify potential risks and create a comprehensive plan to reduce liability and secure their data accordingly.

While it may seem like an expensive investment  at first glance, rebuilding a company without a plan and without insurance coverage can be devastatingly costly. A cyber insurance policy can provide peace of mind that all potential risks are tracked and covered while allowing companies to stay one step ahead of any malicious actors on the internet.

What is Cyber Risk Management?

While cyber insurance is a critical safety net for companies and individuals affected by cyber crimes, risk management is arguably just as important for staying secure. Through strategic risk management practices, businesses can better identify and respond quickly to current and emerging threats, potentially mitigating their exposure to a security breach.

Comprehensive cyber risk assessments can also highlight existing vulnerabilities and develop strategies that reduce the likelihood of being attacked. Advanced cyber insurance plans often demand that certain requirements, such as thorough encryption or two-factor authentication processes, be in place before coverage goes into effect. 

Without sufficiently informed risk management practices in place beforehand, insurance providers may see the business in question as a higher liability than necessary.

Who Is Cyber Insurance For?

In today's digital world, all companies should consider investing in cyber insurance to protect their business in case of a breach. From small mom-and-pop shops to Fortune 500 companies, no business is immune to the potential cost associated with a cyberattack.

With the increased reliance on electronic data and processes, it is paramount for companies to protect their private data, intellectual property, and reputation from malicious online attacks. For companies with an online presence and those that store sensitive customer or employee information electronically, splurging on a cyber insurance policy could be the most cost-effective way to ensure fortification against cyber threats.

A cyber breach can be a tremendous financial burden for companies. The theft of customer data or the installation of ransomware can result in costly losses, including litigation and potential legal repercussions. 

Damaged reputations from a cybersecurity attack can stunt revenue-generating prospects with costs associated with recovery efforts, such as damage repairs, rebuilding infrastructure, and additional security measures will further add to the strain on the company's budget.

Moreover, companies have to consider the indirect costs incurred through lost time and employee productivity while they work to recover their systems. It is recommended that businesses take the necessary steps to prevent cyber threats and thoroughly analyze their expenses when responding to breaches to best guard their finances during such stressful events.

What Does Cyber Insurance Cover?

Cyber policies provide two distinct types of coverage: first-party and third-party. It is essential to understand what is covered so you can properly protect your errors and omissions when working with customers.

First-Party Damages

First-party coverage recognizes the costs of restoring, repairing, or recreating data that may have been destroyed and covers losses caused by a compromised system, including any system downtime costs. First-party cyber coverage protects things like:

  • IT Forensics: Pays for costs to determine if a breach occurred along with the scope and cause of the attack and costs to contain the damage.
  • Regulatory Civil Action: Pays for fines or other expenses related to compliance with GDPR, HIPAA, or other federal or global compliance regulations. 
  • Cyber Extortion: Pays for claims where a cyberattacker steals data and subsequently charges the policyholder to get it back. 
  • Virus Liability: Pays for losses where someone files a lawsuit alleging their computer system became infected by a virus from the policyholder’s system. 
  • Crisis Management Services: Pays for costs to notify victims, set up a call center, and communicate with victims. 
  • Ransomware Protection: Pays for the cost of hiring a negotiator if a hacker disables a computer system and demands payment to enable it. This coverage may also cover costs involving a reward that leads to the hacker’s arrest. 
  • Digital Asset Damage: Pays for the costs related to hacking, theft, and the destruction of digital assets such as documents, passwords, confidential information, email lists, etc. 
  • Loss of Income: Pays for lost income when a policyholder’s website or computer system goes down for a certain period (typically 12 to 24 hours minimum).

Third-Party Cyber Damages

Third-party coverage protects against claims from clients or customers whose data has been exposed or stolen due to a breach by the insured party’s system. This coverage also relates to lawsuits and regulatory consequences like a breach of contract, negligence, PCI fines, and penalties.

Cyber Insurance Coverage Requirements

As part of the application process for cyber insurance, most providers will conduct a risk assessment during the underwriting phase. Depending on their size, businesses may need to fill out a questionnaire or provide data collected by a cybersecurity firm over several weeks. 

Insurance companies may also require businesses to have the following security measures at a minimum:

  • Endpoint security detection and response solution
  • Protected remote desktop protocol
  • Proper data management procedures
  • Regular network backups
  • Cybersecurity risk management as a priority

Insurance providers may also require periodic reassessments.

How Much Does Cyber Insurance Cost?

The cost of cyber insurance depends on many factors, such as the following:

  • Size of the business
  • Industry
  • Amount of data
  • Sensitivity of data
  • Amount of annual revenue
  • Strength of security measures

Because of the many variables involved with cyber insurance, the range of cost is broad. Business owners can expect to pay between $250 on the low end and over $2,000 on the high end for cyber insurance coverage. A study by AdvisorSmith reports that as of 2021, the average annual cost of cyber insurance was around $1,500 for 1 million worth of coverage. 

The Impact of Not Having Adequate Cyber Insurance Coverage

2022 was a wake-up call for the world's governments, businesses, and individuals alike. While cyber security measures had come a long way in the previous decades, major cyber attacks in 2022 exposed vulnerabilities that had not previously been realized. 

These attacks included large-scale ransomware campaigns, catastrophic data breaches that resulted in the theft of consumer financial information as well as intellectual property from corporate networks, and sophisticated phishing –targeting both individuals and organizations with malicious intent. 

Some examples of recent attacks include:

In the summer of 2022, Twitter was rocked by a massive data breach that impacted over 5.4 million customers, leaving them feeling betrayed and vulnerable. However, this ordeal only worsened when another major security failure transpired in November, resulting in millions more being affected. This breach proved an enormous test for the company's cybersecurity measures.

In another data leak incident, a hacker attempted to sell data from 500 million users on the dark web. Impacted customers were located in three countries: US, UK, and Germany.

Medibank, a leading Australian healthcare and insurance provider, experienced an alarming data breach in October 2022. Sadly, the security incident affected 9.7 million patient records across their systems — demonstrating how essential cybersecurity is to protect customer information & sensitive personal data from malicious attacks.

Major data breaches can provide valuable insight into digital security, providing businesses with an opportunity to create more secure systems. These examples also serve as a stark reminder that no business is immune from the threat of significant losses following a breach.

Use Relay Platform to Meet Customer Cyber Insurance Needs

With the ever-growing risk of costly cyber attacks, businesses have a responsibility to protect themselves. From small startups to corporate giants, no company is exempt from this potential threat. Traditional BOPs are not enough for adequate coverage in today's climate. Cyber insurance provides essential protection companies cannot afford to be without.

Relay Platform is the premier platform for brokers who are ready to expand their offering of cyber insurance to customers. Brokers and agents can easily add cyber insurance to every customer quote to build sales and increase revenue. Relay streamlines workflows, automates the custom proposal process, and cuts down on manual data entry. It has never been easier for brokers to make a solid case for cyber insurance and offer it routinely.

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