NEW YORK (Reuters)—The recent string of sensational hacker attacks is driving companies to seek “cyberinsurance” worth hundreds of millions of dollars, even though many policies can still leave them exposed to claims.
Companies are having to enhance not just their information technology practices but also their human resources and employee training functions just to get adequate coverage against intrusion—and in some cases, they also are accepting deductibles in the tens of millions of dollars.
Insurers and insurance brokers say demand is soaring, as companies try to protect themselves against civil suits and the potential for fines by governments and regulators, but also as they seek help paying for mundane costs like “sorry letters” to customers.
“When you have a catastrophic type of data breach, then yes...the phones ring off the hook,” said Kevin Kalinich, co-national managing director of the professional risk group at Chicago-based insurance broker Aon Corp.
In the past few weeks, the U.S. Senate, the International Monetary Fund, defense contractor Lockheed Martin Corp., banking concern Citigroup Inc., technology giant Google Inc. and consumer electronics group Sony Corp. are among those who have disclosed hacker attacks of various kinds.
In the days after Sony disclosed it had more than 100 million customer accounts compromised, the company said its insurance would help cover the costs of fixing its systems and providing identity theft services to account holders.
That helped drum up business for the still-growing segment of the industry, and the demand has only intensified since a more recent breach at Citigroup, which security experts said was the largest direct attack on a U.S. bank to date.
Some insurers say this is the moment the industry has been waiting for as the tide of bad news becomes so overwhelming that customers have no choice but to seek coverage. On Tuesday, The Travelers Cos. Inc. became the latest insurer to launch a package of policies covering various fraud and expense liabilities.
Aon’s Mr. Kalinich said fewer than 5% of data breaches lead to costs of more than $20 million, and yet more and more companies are seeking to be insured for that and more to protect themselves against the shifting risk.
Large customers are going to extremes, taking out coverage for data breach liabilities of as much as $200 million, while also taking $25 million deductibles to keep their premiums down.
Good risk
As with any kind of insurance, data breach policies carry all sorts of exclusions that put the onus on the company. Some, for example, exclude coverage for any incident that involves an unencrypted laptop. In other cases, insurers say, coverage can be voided if regular software updates are not downloaded or if employees do not change their passwords periodically.
“Insurers are all looking for good risks, whether it is a fire insurance company that wants a building that is sprinklered and doesn’t have oily rags laying around—this is the equivalent in the IT area. They want good systems, they want good protection, they want good risk,” said Don Glazier, a principal at Integro Insurance Brokers in Chicago.
Given that the average data breach cost $7.2 million last year, according to a March study from the Ponemon Institute, hundreds of millions of dollars of cover may seem extreme. But with the scale and scope of hacking attacks growing daily, some companies can not be cautious enough.
Of course, the risk they face is a moving target, for them and for the insurance companies. After 10 years of writing policies, industry experts say a consensus is building on what “cyberinsurance” covers.
Generally, such policies now cover third-party liability, like suits filed by customers whose accounts have been hacked; direct costs like notification letters sent to affected customers; and, increasingly, fines and penalties associated with data breaches.
What is missing from the equation, however, is standards. Insurers can try to standardize the risk from hacking attacks, but cyberinsurance still is not auto insurance, where carriers can make their customers wear seat belts as a condition of a policy.
“One day the industry will actually be so robust that...we’ll have the leverage to actually create standards,” said Tracey Vispoli, a senior vp at insurer Chubb Group of Insurance Cos. “We’re not there yet but that to me is a win to the industry.”
