Health, Higher Ed Most Vulnerable to Cyber Attacks
As cyber risk management comes of age, more data and better analysis are leading to new realizations. One is that health care and higher education are the most vulnerable sectors, followed closely by financial services.
Another is that the vast majority of security breaches could be forestalled using simple measures, such as ensuring all updates and patches to software are installed and tested.
However, studies are starting to show that cheap, low-tech email attacks remain stubbornly effective despite expensive, high-tech protections.
All of those ideas were advanced and detailed at a fast-moving panel discussion May 11 in New York, sponsored by brokerage Crystal & Company.
Actuarial data is still thin in cyber, but Christopher Liu, head of cyber risk in the financial institutions group at AIG, said that “institutions in health care and higher education are the most hazardous classes of insureds. That is because they have the most sensitive information and that there is high turnover. Also, they usually do not have big budgets, so security is often not well supported.”
Financial institutions, especially asset managers, are the second-most hazardous class, Liu added.
“They have the same attractive information, plus they have money.”
Mitigating that, they also tend to have better funded and supported security, and they have heavy government regulation. That both keeps them on their toes, and also means greater external surveillance. Several panel members noted that firms became aware of breaches when regulators noticed unusual activity.
“We find that we deal primarily with three areas,” said Austin Berglas, senior managing director at K2 Intelligence.
“Those are: unpatched vulnerabilities in software, misconfiguration of internal systems, and misplaced trust by employees. We get called in to handle a breach, and 99 percent of the time we find the vulnerability is unpatched.”
Berglas explained that the software companies race each other to send out new versions that often are not completely functional or secure. So they send out patches. “Windows does it every week on ‘patch Tuesday.’ But users don’t have any regular schedule or system for installing and testing patches. We find unpatched vulnerabilities dating back as far as 1999.”
“I have been to meetings of the cyber response team, and everyone in the room is introducing themselves. This is the response team. Everyone in the room has to know everyone in the room.” — John F. Mullen, managing partner, Lewis Brisbois Bisgaard & Smith
The challenge of unsecured configurations between systems was dramatically demonstrated with the infamous attack on retailer Target, which came through the air-conditioning vendor. But Berglas emphasized the persistent and pernicious problem of simple phishing.
“It is estimated that 30 percent of individuals within a company will open an email, and 13 percent will click on an attachment, even if they have been warned not to,” Berglas warned.
“You spent half a billion dollars on security systems and firewalls, and one click on one phishing email by someone with elevated system privileges, and the bad guys have just defeated your half-billion-dollar defense. Now they are inside, with credentials, and you can’t detect them.”
The quickest and easiest thing that any company can do, “is to look for unpatched vulnerabilities in public-facing systems,” Berglas urged.
On the same theme, John F. Mullen, managing partner of the law firm Lewis Brisbois Bisgaard & Smith, stressed that “security goes way beyond IT.
“This is not just about the tech guys. Cyber security tends to get pushed downhill.” And that tends to mean lack of coordination on all fronts.
“I have been to meetings of the cyber response team, and everyone in the room is introducing themselves. This is the response team. Everyone in the room has to know everyone in the room.”
Similarly, “insureds have to know the coverage that they have bought. Is there a mandated forensics group? Outside counsel? If so, go meet with them. If you have options, vet them,” Mullen exhorted.
“You spent half a billion dollars on security systems and firewalls, and one click on one phishing e-mail by someone with elevated system privileges, and the bad guys have just defeated your half-billion-dollar defense.” — Austin Berglas, senior managing director, K2 Intelligence
He expects the cyber insurance business to triple or quadruple in the next five years, in terms of premium spending.
Cycling back to the theme of internal responsibility, Paul Miskovich, senior vice president and global practice leader of cyber and technology errors and omissions coverage at Axis, said that 67 percent of cyber claims presented to his firm involved insider activity of some kind: clicking on a phishing email or failing to install a patch or use a firewall. Further, 25 percent of claims involved third parties such as vendors.
For all the focus on the breach itself, Miskovich added that “regulatory costs can be more than the costs of the breach, especially if you don’t have documentation of your security policies and protocols.” That includes documentation that the policies are in place and are rehearsed.
Noting previous comments that many losses are traced to breaches that have gone undetected for years, Miskovich said that a new area within cyber insurance is full coverage for prior acts.
Proactively Enabling Acquisitions
Two of Christopher Cancro’s insurance company clients acquired large peer companies, significantly increasing their respective revenue base and market share. As part of that process, both clients had to integrate coverage for the newly acquired entities into their existing errors and omissions programs.
Cancro was able to negotiate full prior acts coverage for the acquired entities’ E&O for no increase in premium. The key to achieving this result was leveraging the buying power of the new, larger combined entities and adopting a high-disclosure marketing approach that forced the carriers to underwrite the risk on the merits including specific line of business exposure, client loss history and go-forward retentions — rather than simply rely on the fallback response that acquisitions equaled premium.
“Chris is responsive, provides measured advice and shares valuable experience and information,” said a client in the insurance industry. “With his assistance, we renewed and expanded our management liability program in a prudent and cost-effective manner.”
“Chris Cancro is extremely diligent,” said another insurance company client. “He is persistent and tenacious on behalf of his clients and his understanding of products is extremely deep.”
“Chris Cancro is a valued and trusted partner,” said a financial institution client. “He consistently delivers effective and leading-edge solutions for our ever-evolving risk profile.”
Instilling Confidence Among Carriers
One of Edward Conlon’s private equity clients received an offer to purchase one of its portfolio companies. However, another party that was suing the PE firm in a securities case filed a temporary restraining order to stop the sale. The PE firm wished to immediately distribute sales proceeds to its limited partners before the trial ended, so Conlon helped create a very large tower insuring against an adverse judgment.
This entailed answering very difficult questions from multiple carriers, convincing them to get over the “blanket denial” of insuring against litigation outcomes by highlighting the best aspects of the risk profile, leveraging relationships for capacity, working through nine rounds of drafting the primary policy, and creating the quota-share manuscript policy from scratch.
The risk transfer permitted his client to monetize its internal rate of return and distribute proceeds to its limited partners without any caveats or holdbacks — and raise a new fund.
“We had a very difficult project and Ed and his team took it on and did not give up until they got it done,” the client said. “They did a great job.”
“Edward Conlon has given us great service,” said another PE client. “We had a really complex transaction, spinning off one division of a company at the same time we were merging with another company, and our risk profile changed. Ed helped prepare us through that, and that helped management through a very complicated process. He brought resources from his firm to help us rethink issues and stretch targets up front.”
Working with several London syndicates, Dennis Gustafson last year created Bank ExecShield, which offers coverage for civil penalties against bank directors or officers as long as they pay for the coverage themselves. This was in response to regulations stating that such penalties could neither be indemnified by the bank nor covered under the bank’s directors and officers policy.
Gustafson was also able to successfully negotiate a renewal for a client that had a $2.5 million claim. He recommended inviting competing carriers to the underwriter meeting, and after seeing all of the interested parties, the incumbent carrier offered a renewal with a mild rate increase. Gustafson was also able to place a new carrier on the excess layer at enough of a rate decrease to generate an overall flat renewal.
“By drumming up interest from other carriers, this keeps the incumbent carriers very price competitive,” said a bank client.
“Dennis has provided excellent customer service to AmeriNat this past year,” said Adrienne Thorson, chair and chief executive of AmeriNational Community Services. “As we transitioned into a new ownership structure in a very tightly regulated industry, Dennis walked us through step by step what needed to be done to ensure there would be no lapse in coverage.”
“Dennis is a dedicated, passionate, and knowledgeable insurance professional,” said Jeff A. Paolucci, chief financial officer at First Reliance Bank.
A Voyage Across the Pond
One of James Jackson’s clients, Aegon, conducted a request for proposals for its global errors and omissions policy placement, inviting three brokers to compete — including Willis Towers Watson, which has been Aegon’s broker since 2004.
As the lead broker and working closely with colleagues in both London and Bermuda, Jackson proposed restructuring the program out of the London market and reducing Aegon’s relatively high retention. The placement had previously been led from the U.S. market, as that’s where Aegon first purchased the policy and believed they had the greatest exposure.
Jackson and his team retained the business as a result of the proposed solutions. The placement was moved to London, incorporating several unique coverage enhancements, such as loss mitigation costs, that were previously unavailable to them. Aegon is now considering two retention options and two quoted towers presented by Jackson.
“We gave him a pretty significant challenge last year, moving a $300 million program from the U.S. to Europe with some 20 different carriers, and he did an amazing job for us,” said Barry White, Aegon’s global insurance manager.
“James Jackson has been extremely knowledgeable, both in relation to the insurance he places for us, as well as understanding us as a company and the risks we face,” said a client in the life insurance and annuity industry.
They Said It Couldn’t Be Done
Georgina Serio obtained regulatory coverage for one bank client that had a consent order in place, after the prior broker proclaimed that it couldn’t be done. Serio was then able to get the client’s executive liability premium reduced by $250,000, and saved the client more than 20 percent in its regular insurance program by including property owned by the bank that was not directly related to its business.
“I met her several years ago when our bank was ‘troubled,’” the client said. “We had been told that the bank could not get regulatory insurance coverage because of its condition. She said, “Come to New York City with me, make a presentation to 12 underwriters and I will get you regulatory coverage.’”
“I did what she asked and she delivered what she promised,” the client said. “Plus she got us kidnap and extortion coverage and cyber coverage without increasing our premiums over the previous year’s cost. At our next renewal, she was able to reduce our cost about $250,000.”
For Pacific National Bank, which was also operating under consent order, Serio not only was able to obtain coverage, but she was also able to reduce the renewal premium by 35 percent.
“Ms. Serio really had to step up to the plate and diligently work with the carriers to ensure she could secure the appropriate coverage under reasonable terms,” said a client.
Attuned to New Solutions
One of Timothy Sullivan’s financial services clients was buying a bank. After analyzing all of the exposures, Sullivan aggressively pre-negotiated the additional directors and officers policy premium for the acquisition that would be due upon closing of the transaction. This was on top of achieving a significant reduction in the D&O premium for the client, as well as numerous meaningful coverage enhancements, resulting in overall premium savings.
Sullivan also successfully negotiated the inclusion of prior acts coverage for the acquiring bank under the client’s banker’s professional liability program, at a very competitive cost. Moreover, he was able to successfully secure market leading coverage for his client that no other BPL insurer was willing to offer for a financial services firm of that type and size.
Sullivan was also able to negotiate a comprehensive program for the client’s employment practices liability program using the same Bermuda market as the acquiring bank. The cost savings enabled the client to more than double its limits. Indeed, the client increased limits across all lines of coverage, and Sullivan was able to secure all new layers without the requirement of warranty letters.
“Tim is extraordinarily responsive across all management professional liability lines of coverage,” said Arlene Lasagna, senior vice president, corporate insurance at CIT Group Inc. “He gives meaning to the concept of collaboration.”
Commercial Auto Warning: Emerging Frequency and Severity Trends Threaten Policyholders
The slow but steady climb out of the Great Recession means businesses can finally transition out of survival mode and set their sights on growth and expansion.
The construction, retail and energy sectors in particular are enjoying an influx of business — but getting back on their feet doesn’t come free of challenges.
Increasingly, expensive commercial auto losses hamper the upward trend. From 2012 to 2015, auto loss costs increased a cumulative 20 percent, according to the Insurance Services Office.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow,” said David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty at Liberty Mutual Insurance. “As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
For companies with transportation exposure, costly auto losses can hinder continued growth. Buyers who partner closely with their insurance brokers and carriers to understand these risks – and the consultative support and tools available to manage them – are better positioned to protect their employees, fleets, and businesses.
Liberty Mutual’s David Blessing discusses key challenges in the commercial auto market.
“Since the recession ended, commercial auto losses have challenged businesses trying to grow. As the economy improves and businesses expand, it means there are more vehicles on the road covering more miles. That is pushing up the frequency of auto accidents.”
–David Blessing, SVP and Chief Underwriting Officer for National Insurance Casualty, Liberty Mutual Insurance
More Accidents, More Dollars
Rising claims costs typically stem from either increased frequency or severity — but in the case of commercial auto, it’s both. This presents risk managers with the unique challenge of blunting a double-edged sword.
Cumulative miles driven in February, 2016, were up 5.6 percent compared to February, 2015, Blessing said. Unfortunately, inexperienced drivers are at the helm for a good portion of those miles.
A severe shortage of experienced commercial drivers — nearing 50,000 by the end of 2015, according to the American Trucking Association — means a limited pool to choose from. Drivers completing unfamiliar routes or lacking practice behind the wheel translate into more accidents, but companies facing intense competition for experienced drivers with good driving records may be tempted to let risk management best practices slip, like proper driver screening and training.
Distracted driving, whether it’s as a result of using a phone, eating, or reading directions, is another factor contributing to the number of accidents on the road. Recent findings from the National Safety Council indicate that as much as 27% of crashes involved drivers talking or texting on cell phones.
The factors driving increased frequency in the commercial auto market.
In addition to increased frequency, a variety of other factors are driving up claim severity, resulting in higher payments for both bodily injury and property damage.
Treating those injured in a commercial auto accident is more expensive than ever as medical costs rise at a faster rate than the overall Consumer Price Index.
“Medical inflation continues to go up by about three percent, whereas the core CPI is closer to two percent,” Blessing said.
Changing physical medicine fee schedules in some states also drive up commercial auto claim costs. California, for example, increased the cost of physical medicine by 38 percent over the past two years and will increase it by a total of 64 percent by the end of 2017.
And then there is the cost of repairing and replacing damaged vehicles.
“There are a lot of new vehicles on the road, and those cost more to repair and replace,” Blessing said. “In the last few years, heavy truck sales have increased at double digit rates — 15 percent in 2014, followed by an additional 11 percent in 2015.”
The impact is seen in the industry-wide combined ratio for commercial auto coverage, which per Conning, increased from 103 in 2014 to 105 for 2015, and is forecast to grow to nearly 110 by 2018.
None of these trends show signs of slowing or reversing, especially as the advent of driverless technology introduces its own risks and makes new vehicles all the more valuable. Now is the time to reign in auto exposure, before the cost of claims balloons even further.
The factors driving up commercial auto claims severity.
Data Opens Window to Driver Behavior
To better manage the total cost of commercial auto insurance, Blessing believes risk management should focus on the driver, not just the vehicle. In this journey, fleet telematics data plays a key role, unlocking insight on the driver behavior that contributes to accidents.
“Roughly half of large fleets have telematics built into their trucks,” Blessing said. “Traditionally, they are used to improve business performance by managing maintenance and routing to better control fuel costs. But we see opportunity there to improve driver performance, and so do risk managers.”
Liberty Mutual’s Managing Vital Driver Performance tool helps clients parse through data provided by telematics vendors and apply it toward cultivating safer driving habits.
“Risk managers can get overwhelmed with all of the data coming out of telematics. They may not know how to set the right parameters, or they get too many alerts from the provider,” Blessing said.
“We can help take that data and turn it into a concrete plan of action the customer can use to build a better risk management program by monitoring driver behavior, identifying the root causes of poor driving performance and developing training and other approaches to improve performance.”
Actions risk managers can take to better manage commercial auto frequency and severity trends.
Rather than focusing on the vehicle, the Managing Vital Driver Performance tool focuses on the driver, looking for indicators of aggressive driving that may lead to accidents, such as speeding, sharp turns and hard or sudden braking.
The tool helps a risk manager see if drivers consistently exhibit any of these behaviors, and take actions to improve driving performance before an accident happens. Liberty’s risk control consultants can also interview drivers to drill deeper into the data and find out what causes those behaviors in the first place.
Sometimes patterns of unsafe driving reveal issues at the management level.
“Our behavior-based program is also for supervisors and managers, not just drivers,” Blessing said. “This is where we help them set the tone and expectations with their drivers.”
For example, if data analysis and interviews reveal that fatigue factors into poor driving performance, management can identify ways to address that fatigue, including changing assigned work levels and requirements. Are drivers expected to make too many deliveries in a single shift, or are they required to interact with dispatch while driving?
“Management support of safety is so important, and work levels and expectations should be realistic,” Blessing said.
A Consultative Approach
In addition to its Managing Vital Driver Performance tool, Liberty’s team of risk control consultants helps commercial auto policyholders establish screening criteria for new drivers, creating a “driver scorecard” to reflect a potential new hire’s driving record, any Motor Vehicle Reports, years of experience, and familiarity with the type of vehicle that a company uses.
“Our whole approach is consultative,” Blessing said. “We probe and listen and try to understand a client’s strengths and challenges, and then make recommendations to help them establish the best practices they need.”
“With our approach and tools, we do something no one else in the industry does, which is perform the root cause analysis to help prevent accidents, better protecting a commercial auto policyholder’s employees and bottom line.”
This article was produced by the R&I Brand Studio, a unit of the advertising department of Risk & Insurance, in collaboration with Liberty Mutual Insurance. The editorial staff of Risk & Insurance had no role in its preparation.