An Electrifying Threat
Energy and the natural resources industry face especially grim cyber threats.
“If there is a cyber attack, you can’t see or touch that attacker so your ability to quickly respond may or may not be successful,” said Norma Krayem, a senior policy adviser at the Patton Boggs law firm and co-chair of the firm’s homeland security, defense and technology transfer practice group.
“I think the likelihood of such an attack absolutely exists,” she said. “I think the question becomes more about who, when and why.”
According to Symantec, a data security company, the energy sector “has become a major focus for targeted attacks and is now among the top five most targeted sectors worldwide.”
The threats may come from competitive spying, corporate espionage, cyber criminals, hacktivism, disgruntled employees and state-sponsored disruptions, it said.
A bad result doesn’t even necessarily have to begin with bad intent, said Cliff Lancaster, senior risk analyst at Hartford Steam Boiler Inspection and Insurance Co. (HSB).
At the Davis–Besse Nuclear Power Station in Ohio, for example, the network became infected with a worm that shut it down for five hours in 2003 because a software consultant had created a shortcut for his own convenience that bypassed the firewall, he said.
Possible Widespread Devastation
As security measures increase, employees and vendors may be ever more tempted to bypass procedures, just to more easily get their work done.
Between July 2012 and June 2013, 16 percent of all cyber attacks each day targeted companies in the energy sector, according to Symantec. Only the government or public sector had more targeted attacks.
And should the energy delivery system be disrupted, that threatens the country’s finance, transportation, health care, water supply and emergency services systems — all of which depend on reliable energy.
– Norma Krayem, senior policy adviser, Patton Boggs
Electric grid vulnerabilities that lead to power disruptions are estimated to cost the U.S. economy between $119 billion to $188 billion each year, according to a 2013 report on grid vulnerability by Rep. Edward J. Markey, D-Mass., and Rep. Henry A. Waxman, D-Calif.
“Power disruptions today generally do not lead to insured losses,” said Robert Hartwig, president of the Insurance Information Institute.
“However, it seems only a matter of time before a major cyber attack leads to the type of damage covered by standard property and liability policies,” he said.
“As we look at what hackers have been able to do in terms of infiltrating presumed secure systems — even entities like the Department of Defense — it seems there must be vulnerabilities in the systems associated with major infrastructure in this country, whether it’s electric, water, transportation or communications.”
Complex Risk Management
The degree to which computer technology and networking are integral to the energy sector in an operational sense makes it a particularly complex risk-management challenge, said John Kerns, executive managing director of Beecher Carlson Financial Services.
“There was a question posed to us by a client earlier this year: What if there were a denial-of-service attack or virus that shut down the gas pipelines coming into Chicago in the middle of winter. Homes went cold and people went to the hospital or even died. There was no physical damage, but clearly there was a serious impact, and loss,” he said.
The challenges are not confined to traditional energy markets either, said Charles Long, vice president of renewable energy and green technology at William Gallagher Associates. “Many computers are covered under a basic commercial package, and wind farms have separate coverage. If there is a lightning strike, that is surely covered. If data just failed, that can be covered by E&O, but data corruption or a virus, that kind of thing is very much still under consideration.”
Fred Podolsky, executive vice president, executive risk, Alliant Insurance Services, said that “only a small fraction,” maybe 10 percent of U.S. based utility companies have bought cover, and most of the policies that have been purchased relate to data breach exposures.
Some companies, however, have “woken up and are looking for cover” to help them repair their power-generation network and computer systems should they be damaged, or to protect them from other service interruption or customer liability issues, he said.
But many utilities refuse to provide underwriters with sufficient information to get the coverage they need, he said.
The main reason? “It’s just a pure confidentiality concern. IT folks are just so fearful to release any information to anyone having to do with their security procedures, though pressure is building from risk management and others in the C-suite to address these exposures,” Podolsky said.
While protecting the actual control systems of energy companies is a high priority that is audited by the federal government, the smart grid — that measures and creates a more efficient distribution of electricity based on use — is vulnerable, said HSB’s Lancaster.
If false data were injected into that system, it could potentially cause turbine generators to speed up when they shouldn’t. “If you can get it spinning at the wrong speed,” he said, “it can just shake itself to death.”
Once a turbine or transformer is damaged, there is a limited amount of replacement equipment.
And once a turbine or transformer is damaged, there is a limited amount of replacement equipment, he said. “If you are able to damage many pieces of equipment at once, it would take a lot of time to fix it because you have to build and rebuild lots of equipment,” Lancaster said.
Krayem said the connectivity of entities that distribute electric power, for example, means there could be “cascading failures” throughout the country.
“You have this patchwork of systems that are being cobbled together, a lot of them are legacy systems, and they are not necessarily all at the same level of security,” she said.
According to KPMG, which cited data from the U.S. Department of Homeland Security, the “constant barrage of cyber attacks” on water and energy companies “usually take the form of cyber espionage or denial-of-service attacks against industrial-control systems.”
Inadequate Security Controls
The consultancy also noted that a survey by The Centre for Strategic and International Studies in 2010, found that critical infrastructure, including power grids, industrial control networks and oil refineries “are not adequately prepared to defend themselves.”
Video: Dissecting Stuxnet
The most famous of all attacks on an energy system occurred in Iran when unknown forces — believed to be the United States and Israel — created the Stuxnet worm, specially designed to target Iran’s specific industrial control system and reprogram it so that the nuclear centrifuges spun out of control and damaged themselves while the displays indicated normal functioning.
Most notably, Stuxnet spread using a USB drive, infecting networks that were unreachable by the Internet.
Another disturbing attack occurred in 2012, when a cyber attack hit Saudi Aramco, one of the largest oil producers in the world. The disruption, which continued for two weeks, disabled more than 30,000 of the company’s workstations.
The virus, later named “Shamoon,” was the first significant cyber attack on a commercial target to cause real damage. It is also the most destructive attack the private sector has experienced to date, said Malcolm Marshall, global leader for information protection at KPMG, based in London.
Marshall said that “one senior oil-industry executive to whom I spoke shortly after the Shamoon incident told me, ‘Well, there goes our worst-case scenario.’ ”
That same month, Rasgas, in Qatar, was hit by the same virus and forced to bring its entire network off line.
In 2011, hackers were able to install malware and “evidence of a sophisticated threat actor” was found in the U.S. energy sector, according to the U.S. Government Accountability Office.
An Active Market
Marshall noted that, in the aggregate, the global oil and gas industry “is effectively self-insured, but cyber security is an active and growing commercial market, especially in the U.S. It seems likely that will become an economic necessity.”
Kerns at Beecher Carlson said, “We are seeing multiple policies responding to these threats. Those include dedicated cyber policies, D&O coverage, and in the energy sector, even general liability policies are responding.”
That said, he added that “the insurance market is looking aggressively at cyber risk, and is putting on new exemptions, restrictions, and limits. The gray areas are still some GL, bodily injury, and third-party injury. Mostly, we are seeing GL carriers not willing to pick up many risks. That leaves owners and brokers to see what the cyber market is willing to do.
“There is capacity to address business interruption, but we are having to press on bodily injury and property damage as they relate to cyber,” he said.
Complete coverage on the inevitable cyber threat:
Risk managers are waking up to the reality that the cyber risk landscape has changed.
Cyber: The New CAT. It’s not a matter of if, but when. Cyber risk is a foundation-level exposure that must be viewed with the same gravity as a company’s property, liability or workers’ comp risks.
Critical Condition. The proliferation of medical devices creates a host of scary risks for the beleaguered health care industry.
Disabled Autos. It’s alarmingly easy for a hacker to take control of a driverless vehicle, tampering with braking systems or scrambling the GPS.
Unmanned Risk. The dark side of remote-controlled drones, which have already been hacked — by students.
Wind Turbines Slow Down Hurricane Winds
Off the New York coastline would be a perfect place for an array of wind turbines, according to a Stanford professor. It would not only offer clean energy to the Big Apple but it would protect it the next time a Superstorm Sandy comes calling.
“If you have a large enough array of wind turbines, you can prevent the wind speeds [of a hurricane] from ever getting up to the destructive wind speeds,” said Mark Jacobson, a professor of civil and environmental engineering at Stanford University.
Computer models demonstrated that offshore wind turbines reduce peak wind speeds in hurricanes by up to 92 mph and decrease storm surge by up to 79 percent, said Jacobson, who worked on the study with University of Delaware researchers Cristina Archer and Willett Kempton.
“The additional benefits are there is zero cost unlike seawalls, which would cost about $30 billion,” he said, noting that the wind turbines “generate electricity so they pay for themselves.”
The researchers studied three hurricanes, Sandy and Isaac, which struck New York and New Orleans, respectively, in 2012; and Katrina, which slammed into New Orleans in 2005. Generally, 70 percent of damage is caused by storm surge, with wind causing the remaining 30 percent, he said.
That’s why onshore wind farms would not be as effective, he said. While they would reduce the wind speed, they wouldn’t impact storm surge.
In 2013, one of the “most inactive” Atlantic hurricane seasons on record, insured losses totaled $920 million, according to Guy Carpenter, which relied on information from the Mexican Association of Insurance Institutions. The most noteworthy events were Hurricane Ingrid in the Atlantic and Tropical Storm Manuel in the Pacific, which displaced thousands as they caused excessive rainfall, flooding and mudslides.
According to the Insurance Information Institute, Katrina was the costliest hurricane in insurance history, at $48.7 billion, followed by Andrew in 1992 at $25.6 billion and Sandy at $18.8 billion. Economic losses, of course, were much higher.
Wind turbines, which can withstand speeds of up to 112 mph, dissipate the hurricane winds from the outside-in, according to Jacobson’s study. First, they slow down the outer rotation winds, which feeds back to decrease wave height. That reduces the movement of air toward the center of the hurricane, and increases the central pressure, which in turn slows the winds of the entire hurricane and dissipates it faster.
The benefit would occur whether the turbines were immediately upstream of a city, or along an expanse of coastline. It could take anywhere from tens of thousands to hundreds of thousands of wind turbines off the coast to offer sufficient hurricane protection.
At present, there are no wind farms off the U.S. coastline, although 18 have been proposed for off the East Coast. Proposals have also been made for off the West Coast and the Great Lakes. There are 25 operational wind farms off the coast of Europe.
“Overall,” Jacobson and his colleagues concluded in the study, “we find here that large arrays of electricity-generating offshore wind turbines may diminish hurricane risk cost-effectively while reducing air pollution and global warming, and providing local or regionally sourced energy supply.”
5 & 5: Rewards and Risks of Cloud Computing
Cloud computing lowers costs, increases capacity and provides security that companies would be hard-pressed to deliver on their own. Utilizing the cloud allows companies to “rent” hardware and software as a service and store data on a series of servers with unlimited availability and space. But the risks loom large, such as unforgiving contracts, hidden fees and sophisticated criminal attacks.
ACE’s recently published whitepaper, “Cloud Computing: Is Your Company Weighing Both Benefits and Risks?”, focuses on educating risk managers about the risks and rewards of this ever-evolving technology. Key issues raised in the paper include:
5 benefits of cloud computing
1. Lower infrastructure costs
The days of investing in standalone servers are over. For far less investment, a company can store data in the cloud with much greater capacity. Cloud technology reduces or eliminates management costs associated with IT personnel, data storage and real estate. Cloud providers can also absorb the expenses of software upgrades, hardware upgrades and the replacement of obsolete network and security devices.
2. Capacity when you need it … not when you don’t
Cloud computing enables businesses to ramp up their capacity during peak times, then ramp back down during the year, rather than wastefully buying capacity they don’t need. Take the retail sector, for example. During the holiday season, online traffic increases substantially as consumers shop for gifts. Now, companies in the retail sector can pay for the capacity they need only when they need it.
3. Security and speed increase
Cloud providers invest big dollars in securing data with the latest technology — striving for cutting-edge speed and security. In fact, they provide redundancy data that’s replicated and encrypted so it can be delivered quickly and securely. Companies that utilize the cloud would find it difficult to get such results on their own.
4. Anything, anytime, anywhere
With cloud technology, companies can access data from anywhere, at any time. Take Dropbox for example. Its popularity has grown because people want to share large files that exceed the capacity of their email inboxes. Now it’s expanded the way we share data. As time goes on, other cloud companies will surely be looking to improve upon that technology.
5. Regulatory compliance comes more easily
The data security and technology that regulators require typically come standard from cloud providers. They routinely test their networks and systems. They provide data backups and power redundancy. Some even overtly assist customers with regulatory compliance such as the Health Insurance Portability and Accountability Act (HIPAA) or Payment Card Industry Data Security Standard (PCI DSS).
1. Cloud contracts are unforgiving
Typically, risk managers and legal departments create contracts that mitigate losses caused by service providers. But cloud providers decline such stringent contracts, saying they hinder their ability to keep prices down. Instead, cloud contracts don’t include traditional indemnification or limitations of liability, particularly pertaining to privacy and data security. If a cloud provider suffers a data breach of customer information or sustains a network outage, risk managers are less likely to have the same contractual protection they are accustomed to seeing from traditional service providers.
2. Control is lost
In the cloud, companies are often forced to give up control of data and network availability. This can make staying compliant with regulations a challenge. For example cloud providers use data warehouses located in multiple jurisdictions, often transferring data across servers globally. While a company would be compliant in one location, it could be non-compliant when that data is transferred to a different location — and worst of all, the company may have no idea that it even happened.
3. High-level security threats loom
Higher levels of security attract sophisticated hackers. While a data thief may not be interested in your company’s information by itself, a large collection of data is a prime target. Advanced Persistent Threat (APT) attacks by highly skilled criminals continue to increase — putting your data at increased risk.
4. Hidden costs can hurt
Nobody can dispute the up-front cost savings provided by the cloud. But moving from one cloud to another can be expensive. Plus, one cloud is often not enough because of congestion and outages. More cloud providers equals more cost. Also, regulatory compliance again becomes a challenge since you can never outsource the risk to a third party. That leaves the burden of conducting vendor due diligence in a company’s hands.
5. Data security is actually your responsibility
Yes, security in the cloud is often more sophisticated than what a company can provide on its own. However, many organizations fail to realize that it’s their responsibility to secure their data before sending it to the cloud. In fact, cloud providers often won’t ensure the security of the data in their clouds and, legally, most jurisdictions hold the data owner accountable for security.
Risk managers can’t just take cloud computing at face value. Yes, it’s a great alternative for cost, speed and security, but hidden fees and unexpected threats can make utilization much riskier than anticipated.
Managing the risks requires a deeper understanding of the technology, careful due diligence and constant vigilance — and ACE can help guide an organization through the process.
To learn more about how to manage cloud risks, read the ACE whitepaper: Cloud Computing: Is Your Company Weighing Both Benefits and Risks?