May 11 2021

Significance of risk management in cyber insurance to determine premium

Category: Cyber InsuranceDISC @ 3:33 pm

By DISC InfoSec

The limited availability of data on cyber incidents has made it difficult to develop full probabilistic models for use in pricing cyber insurance cover. While a few insurance companies, brokers and other companies have developed pricing models that provide quantifiable probabilistic estimates of potential losses based on Fair methodology, the vast majority of insurers still continue to use scenario-based approaches for estimating the potential frequency and severity of cyber incidents. Assessments of frequency and severity are usually based on publicly available data on past incidents. There are a few commercial companies that collect and market data on past incidents.

The insurability of a given risk is usually economically viable only where Risks must be quantifiable: the probability of occurrence of a given peril, its severity and its impact in terms of damages and losses must be assessable.

In the case of data confidentiality breaches, data on past breaches provides insurance companies with a basis to assess the level of risk based on different company characteristics and estimate the per record cost of a breach. Therefore, part of the underwriting process involves understanding the business activities and number and types of information records held by the company. Given the longer experience with data breach notification laws and the more developed stand-alone cyber insurance market, much of the available data is based on experience in the United States.

Insurance companies also focus significant attention on the company’s security practices and policies, depending on company size and amount of coverage being sought. For smaller companies/coverage amounts, the underwriting process will focus on basic cyber security practices such as use of a firewall, anti-virus/malware software and data encryption, as well as frequency of data backups and use of intrusion detection tools. In some cases, applications may ask about compliance with specific standards, such as the International Organization for Standardization standard on Information Security (ISO/IEC 27001); the US National Institute of Standards and Technology (NIST) Framework for Improving Critical Infrastructure Cybersecurity; or the UK Cyber Essentials. Companies that hold payment card information might also be asked about their compliance with the PCI Data Security Standard while US companies with health records might be asked about their compliance with Health Insurance Portability and Accountability Act security requirements. Some stand-alone cyber insurance applications also request information on plans and policies, such as data protection policies, network access policies, internal auditing policies, disaster recovery plans, etc., as well as governance processes in place for those policies. Larger companies would face additional scrutiny, potentially involving on-site interviews, security audits and/or penetration testing. Risk and vulnerability assessments by external security consultants are offered by some companies as an additional service included as part of the insurance policy.

Insurance companies use the information gathered through the underwriting process to determine premium levels or deny the coverage. Some insurers may also establish minimum security standards that must be maintained through the coverage period in order for coverage to be maintained or sustained, such as timely patching of vulnerabilities and/or other software updates.

Cyber-insurance is an insurance product used to protect businesses and individual users from Internet-based risks, and more generally from risks relating to information technology infrastructure and activities. Cyber insurance purchased by an insured (first party) from an insurer (the second party) for protection against the claims of another (the third party). The first party is responsible for its own damages or losses whether caused by itself or the third party.

Cyber insurance may offer services products and countermeasures to protect business from known and unknown risks. There are now mandatory breach notification state laws (in many states) and regulation (HIPAA) which require breach notification. In services area cyber insurance may help organization to cover the cost of notifications and sometime may notify on behalf of an organization. The breach notification service may be necessary for SMB’s to acquire due to lack of necessary in-house resources. Depending on your business, few other items you may want to consider under cyber insurance are data restoration cost, payment of ransom, identity theft protection and reissuing of cards, potential downtime due to DDoS and potential regulatory fines.

How does a second party, an insurance company determine that first party premium (an amount to be paid for an insurance policy) and even decide that first party is insurable. The insurance company will look at organization’s security posture maturity based on industry standards and regulations (ISO, NIST, CSC, CSF) and determine if their Security Program is worthy of cyber insurance. Based on the existing security posture of an organization the second party will determine the risk they are willing to take and first party will determine the cost they are willing to pay for the premium. In the some cases insured might be able to absorb losses of the breach which were not covered by insurance but for some SMB’s these losses may be business limiting.

A point–in-time evaluation of an organization’s information security posture in constantly evolving, threat landscape only increases the challenge of insurance company to determine the first party premium. The insurance company may require a continuous feed to an organization security posture dash board which may also include but not limited to monitoring of security incident response on regular basis. Before making a decision on cyber insurance premium, an insurance company should utilize an in-house expertise or collaborate with InfoSec consulting organization to evaluate the frequency and severity of cyber threats facing an organization information security management system.

At end of the day, cyber insurance is a proactive security measure to counter potential data breaches and network security failures. Routinely, organizations are willing to spend money on security initiatives after the breach which is reactive action. Proactive security measures such as (developing sound security policies, compulsory cloud security, continuous monitoring, strong security awareness, effective BCP, proactive patching, resilient incident response plan…) may help not only to reduce the overall risk landscape but can assist in lowering the cyber insurance premium.

Proactive information security program which include but not limited to the basic cybersecurity measures may require acquiring cyber insurance. Insured organization (first party) may need to keep up with the basic cyber security measures to prevent voiding the coverage. When a functional and operational information security program which has a clear definition of an organization risk threshold becomes a priority, it can minimize potential risk of security breach and should be able to absorb losses for future security breach with cyber insurance as a part of risk management strategy.

DISC InfoSec assist in acquiring the cyber insurance which is aligned with business objectives and based on organization risk threshold. Before coverage is issued by the underwriter, in some cases, organization is asked to mitigate some risks to lower the premium. DISC InfoSec assist in compliance with standards, coverage inclusion/exclusion and risk mitigation process for organization acquiring cyber insurance.    

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Tags: Cyber Insurance, cyber insurance premium

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