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.”
Buyers Beware: General Liability Outlook May be Shifting
The soothing drumbeat of “excess capital” and “soft market” to describe the general liability (GL) market is a familiar sound for brokers and buyers. Emerging GL trends, however, suggest the calm may not last.
Increasing severity of GL claims may hit some sectors like a light rain at first, if they have not already, but they could quickly feel like a pelting thunderstorm in others. A number of factors could contribute to the potential jump in GL prices for certain industry segments or exposures, possibly creating “micro” or niche hard markets in the short-term, and maybe even turning the broader market over the longer-term.
“There are trends we’re seeing that will play out slowly. Industries that carry more general liability exposure will and have been hit first and hardest, but it won’t apply across the board initially,” said David Perez, Senior Vice President and Chief Underwriting Officer, for Liberty Mutual Insurance’s National Insurance Specialty operation. “There is ample capital in the market today, which allows a poor performing account to move its policy frequently from carrier to carrier. Poorer performing classes, however, will likely face increased pricing for GL policies and a reduction in capacity.”
The good news for buyers is that they can take action today to lessen the impact these trends and the evolving market may have on their GL programs.
David Perez on the state of the GL market.
Medical and Litigation Trends Drive Severity
One factor increasing claim severity is the rising cost of health care, driven both by greater demand and by medical inflation that is growing faster than the Consumer Price index.
The impact of rising medical costs on commercial auto is well-known. Businesses with heavy transportation exposures are finding it more difficult to obtain coverage, or are paying more for it.
That same trend will impact general liability, just on a slower and more fragmented basis.
“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk.”
— David Perez, Senior Vice President & Chief Underwriting Officer, National Insurance Specialty, Liberty Mutual Insurance
“It takes longer for medical inflation to register through the tort system in general liability than it does in auto liability (AL) because auto claims are generally resolved more quickly,” Perez said. “But the same factors affecting severity in AL also exist in GL and as a result, it’s foreseeable that we will not only see similar severity trends in GL, but they may in fact be worse than we’ve seen in commercial auto.”
Industries with greater exposure to severity in general liability claims should be the first wave of companies to notice the impact of medical inflation.
“Medical inflation will drive up costs across the board, but sectors like construction and product manufacturing have a higher relative exposure for personal injury lawsuits.”
The impact of medical inflation on the GL market.
Beyond medical inflation, two litigation trends are increasing GL damages. First, plaintiffs’ lawyers are seeking to migrate the use of life care plans—traditionally employed only for truly catastrophic injuries—to more routine claims. Perez recalled one claimant with a broken thumb and torn ligaments who sought as much as $1 million in care for the injury for the rest of his life.
Second, the number of allegations of traumatic brain injuries (TBI) in GL claims is growing. It can be difficult to predict TBI outcomes initially and poor outcomes can be expensive and long tailed.
“In light of these trends, brokers and buyers should seek to understand how effectively their current or potential insurers defend GL claims, particular in using evidence-based medicine to assess and value the medical portion of a claim, and how they can provide necessary care to claimants while still helping clients control their total cost of risk,” notes Perez.
Changing Legal Landscape
Medical inflation and litigation trends are not the only issues impacting general liability.
Unanticipated changes in court interpretations of policy language can throw unexpected pressure on GL pricing and capacity.
Courts sometimes issue rulings interpreting policy language in a manner that expands coverage well beyond the underwriter’s original intent. Such opinions may sometimes have a retroactive effect, resulting in an immediate impact on not only open, but also closed cases in some circumstances.
Shifts in the Marketplace
In addition to facing price increases, GL brokers and buyers will be challenged by slightly shrinking capacity due to consolidation and repositioning among carriers in the marketplace. “Some major carriers have scaled back their GL writing, resulting in a migration of experienced senior management. As these executives leave, they take their GL expertise and relationships with them, resulting in fewer market leaders and less innovation,” Perez said.
“Additionally, there are new carriers coming into the business that may not have the historical GL loss data to proactively identify trends or the financial strength and experience to effectively service their GL customers and brokers. Both trends make it important for brokers and buyers to work with an insurer that is committed to the GL market and has the understanding and resources to help better manage risks impacting customers.”
Last year saw a high level of mergers and acquisitions in the insurance industry. Buyers should take advantage of that disruption to re-evaluate their needs and whether their insurers are meeting them. Or better yet, anticipating them.
What’s a Buyer to Do?
Buyers—and their brokers— should look to partner with insurers that can spot emerging trends and offer creative solutions to address them proactively.
What should buyers and brokers do, given the trends facing the GL market?
“Brokers and buyers should value insurers that have not only durability and a long history in the general liability business, but also a strong risk management infrastructure,” Perez said. “Your insurer should be able to help you mitigate your specific risks, and complement that with coverage that works for you.”
Beyond robust GL claims and legal management, Liberty Mutual also provides access to one of the insurance industry’s largest risk control departments to help improve safety and mitigate both claim frequency and severity.
In addition, notes Perez, “Even if a company has a less than optimal loss history in general liability, there can be options to provide adequate coverage for that company. The key is to partner with an insurer that has the best-in-class expertise, creativity, and flexibility to make it happen.”
By working closely with their insurers to understand trends and their potential impacts, brokers and buyers can better prepare for the possible GL storm on the horizon.
To learn more about Liberty Mutual’s general liability offering, visit https://business.libertymutualgroup.com/business-insurance/coverages/general-liability-insurance-policy.
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.