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Retail Data Exposures

Emerging Ways to Pay

New e-payment systems offer some data security advantages but they face implementation difficulties.
By: | November 17, 2014 • 6 min read
iphone6plus

With massive data breaches among big box retailers and major banks consistently making headlines, the cry for more secure consumer payment methods has reached a crescendo.

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Yet, the critical question remains: Will emerging technologies — from “chip/pin” credit cards to Apple Pay, Google Wallet and other similar e-payment products — stem the data risk tide?

And if so, will there be a winner among the group? Will there be a single payment system that can give both retailers and their customers a sense of security that currently doesn’t exist?

It’s much too early to tell, experts said. The main challenge now may be sorting through the various technological options — in addition to the potential cost and difficulty of implementing a new standard system.

Video: Mashable took Apple’s new payment system to the streets of New York City to see how it worked.

For example, some large retailers such as Wal-Mart, Rite Aid and CVS recently announced they would not accept Apple Pay, which uses the iPhone and major credit cards as its “touchless” payment delivery system.

Those large retailers and others are planning to use an alternative e-payment technology, called CurrentC, which bypasses major credit cards completely. The retailers favor that system because it eliminates the transaction fees charged by credit card companies to retailers.

According to Aaron Press, director of e-commerce and risk solutions at LexisNexis Risk Solutions in Dallas, each of the various mobile wallet systems has its own advantages.

One key benefit of systems such as Apple Pay and CurrentC is that they do not pass actual card data to the merchant, so there is no account information either in storage or in transit that can be compromised.

“If the wallet systems are secure, then consumers benefit from not sharing their payment credentials with merchants,” he said. “This means that even in the event of a breach, the consumer will not have to worry about their information being stolen and dealing with the hassle of disputing fraudulent charges or receiving new account numbers.”

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In addition, said David Katz, leader of the privacy and information security practice group at Nelson Mullins in Atlanta, Apple Pay’s biometric Touch ID technology makes it “difficult for a thief or imposter to use an iPhone to complete transactions fraudulently.

“Consumers whose phones are stolen or misplaced can easily use the ‘Find my iPhone’ feature to suspend all payments,” he said.

“Even if the world magically adopted chip/pin technology overnight, hackers would simply find a new way to turn card data into money.” — Russ Spitler, vice president of product management, AlienVault

However, he added, with 800 million credit cards on file — not to mention the brand new watch/fitness trackers that contain large amounts of health data — Apple may have succeeded in making itself the primary target.

Press noted that it is not yet clear whether Apple Pay or CurrentC will be vulnerable to fraudulent use.

E-wallet providers must ensure that the credentials being provisioned and used actually belong to the consumer attempting to use them, and that the applications, processes and infrastructure are secure, he said. The biometrics used with the Apple Pay process are helpful, but not a panacea.

Biometric Advances

Apple Pay, however, represents a security improvement over magnetic stripe architecture since it requires stealing a victim’s phone and successfully duplicating their fingerprint to commit fraudulent transactions, said Paco Hope, principal consultant at security consulting firm Cigital, in Dulles, Va.

Apple Pay also includes architecture (such as proxy numbers instead of account numbers) that contributes additional security, he said.

Russ Spitler, vice president of product management at AlienVault, a security provider in San Mateo, Calif., called Apple Pay a “major move” for the payment industry.

While the underlying technology is not new, Apple has the market share and mindshare to make it popular, he said. Shifts in payment technology are driven by consumer demand, not retailer preference.

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“In the past, Apple has proven to manage private data very responsibly — they take encryption seriously and implement it well,” Spitler said. “They are still prone to attacks against their users such as the recent iCloud issues — but they are working to add more features to help safeguard even in that situation.

“With Apple Pay, I am hopeful we will turn the corner on the horrible status quo of credit cards,” he said.

Structural Challenges

Because the U.S. adopted credit cards faster than they spread across Europe, Spitler said, the infrastructure in the U.S. is antiquated and entrenched, such as the point-of-sale (POS) systems reliant on magnetic stripe technology.

Moving past that to new EMV-based credit cards (also referred to as chip-and-PIN, chip-and-signature, chip-and-choice, or generally as chip technology) will require a major retrofit of a very distributed payment system in use for a long period of time, he said.

Video: A brief look at some of the advantages and challenges with EMV technology.

“Each corner store will have to invest in new technology at great cost to themselves and without any demand from the consumer; that’s a really difficult request to make of a small business,” he said.

EMV supports dynamic authentication (numbers change with each transaction), which means a cardholder’s data is more secure on a chip-enabled payment card than on a magnetic stripe card, and is much more difficult to copy or counterfeit.

“Magnetic stripe technology makes it dirt simple to clone a card once you have the electronic data associated with it,” Spitler said.

However, he said, the use of chip/pin technology does not guarantee the long-term elimination of risk.

“Even if the world magically adopted chip/pin technology overnight, hackers would simply find a new way to turn card data into money,” Spitler said.

Hope said that payment networks are introducing risk management beyond simply accepting or denying charges. Contactless payment systems deployed in the UK, for example, are usually dependent upon a variety of limits on total amount, number of transactions and transactions per time period.

“This is what it looks like when modern risk management meets the retail experience: the strength of the security measures in place,” he said. “Retail customer data in the future will be much more carefully protected using similar designs.”

Cyber Coverage

Regardless of what type of payment system is used, Collin Hite, who leads the insurance recovery group at Hirschler Fleischer in Richmond, Va., said all businesses should have cyber insurance, even though many companies still don’t believe they are likely targets.

The first party aspects of such coverage can be critical to a business since the insurance pays for forensic investigation and re-securing the network, in the event of a data breach, he said.

“This is typically the largest cost — not the actual loss of information of the consumers,” he said.

“While we know the Fortune 500 to 1000 are considering specific cyber coverage, middle-market businesses need to understand that they are as vulnerable as the ‘big boys,’ ” he said.

Craig Young, a mobile security researcher for Tripwire, in Portland, Ore., said the best risk management strategy is to move to the next technology as quickly as possible.

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“The ancient swipe and sign technology that dominates American retail is long overdue for a funeral,” he said. “For years, credit cards have been low-hanging fruit for thieves with a variety of techniques to steal card data, reproduce cards and start spending.”

LexisNexis’ Press added that it’s way too early to declare a front runner in mobile payments, and that magnetic stripe cards will be around for several more years.

“There is no security salvation or fraud magic bullet, but many of the new technologies offer a lot of promise,” Press said. “EMV will drastically improve POS security and reduce counterfeit fraud.  Biometrics is a promising option for identity verification.”

But, he warned, new technologies can open the window to new problems while shutting the door to known issues. Adding new technologies such as mobile, he said, increases the number of potential blind spots.

“Companies need to evaluate the risks and benefits of adding any new commerce technology or channel to their environment,” Press said.

Tom Starner is a freelance business writer and editor. He can be reached at riskletters@lrp.com.
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Risk Scenario

Midnight Blitz

On Cyber Monday, skilled hackers diminish an online retailer's credibility in mere minutes.
By: | November 13, 2014 • 8 min read
Risk Scenarios are created by Risk & Insurance editors along with leading industry partners. The hypothetical, yet realistic stories, showcase emerging risks that can result in significant losses if not properly addressed.

Disclaimer: The events depicted in this scenario are fictitious. Any similarity to any corporation or person, living or dead, is merely coincidental.

The Citadel

The October 2015 cover of the trade publication Retailer’s World featured a picture of Paul Vitez, general counsel for cloud host Va-Voom!, which rewrote the book on online shopping, making a billionaire of its founder, Teddy Houck.

Scenario_MidnightBlitz

In glowing prose, the author of the Retailer’s World cover story related Vitez’ impressive academic record at Haverford College, his background in finance and his role in earning for Va-Voom! the nickname of “The Citadel” for its innovative, committed approach to cyber security.

Employing the “prison, not a castle” approach to cyber security, Vitez and Va-Voom! created “honey- pots” within the Va-Voom! system, decoys which looked like they contained important data but were not actually part of the internal network.

Moving much more swiftly than its competitors, Va-Voom! also spent millions to implement chip and pin credit card technology on its credit cards, a much more secure way to store sensitive financial and personal information than the traditional magnetic strip.

Again with an eye toward short-term investment in operations and a goal of long-term success, Vitez was given carte blanche by Teddy Houck and the Va-Voom! board of directors to spend top dollar for information technology talent that had honed their skills in the high-stakes environments of the CIA and the Department of Defense.

Partner

Partner

From an information technology policy perspective, Va-Voom! was a demanding place to work. Under Vitez’ direction, the use of data encryption was heavily enforced. It also had a strict company policy barring employees from connecting personal devices to any computer equipment owned by Va-Voom! or to its network.

In 2014 and 2015, one by one, major retailers — even banking institutions — were hit by cyber attacks that undermined the public’s faith in those companies, doing serious mid- to long-term damage to their reputations. Retailers that learned only too well the degree to which they were vulnerable to attack found in Va-Voom! a business partner they felt they could trust.

Rather than being dampened by cyber fears, the trend of cyber attacks in 2014 and early 2015 actually increased the number of retailers that wanted to do business with Va-Voom!

The company’s insurance program was something of an anomaly, considering its position in the industry. Starting with a substantial retention, Va-Voom! carried property and professional liability coverage for its employees.

The company considered but never purchased coverage that would substantially indemnify the hundreds of retailers and other service providers that used its services, were Va-Voom! to be the victim of a cyber-security incident. It carried third-party liability insurance, but not as much as you would think a company of its size would carry.

“Really?” Vitez memorably said during a meeting with Steve Francis, the company’s chief risk officer and company CFO Maribel Kelly, when the subject of cyber security indemnification was broached by Va-Voom!’s broker, himself no slouch when it came to these matters.

With an eye to the merciless whims of stock market investors, Vitez and Kelly sided against Steve Francis when he argued that the cost of the premium, though it would put a slight dent in the company’s bottom line on a quarterly basis, was well worth the expense.

“Nobody manages this risk better than we do,” Vitez said, crossing his arms across his chest.

“We can and do own this risk,” he said.

Steve Francis looked at Vitez across the table but didn’t say what he was thinking. What he was thinking was, “You just bit off way more than you can chew, Mr. Haverford.”

Poll Question

Has your company conducted a cyber-security assessment of is information technology infrastructure?

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The Blitz

Just before midnight on Nov. 30, 2015, the Monday after Thanksgiving, known in retailing as Cyber Monday, a highly sophisticated and well-coordinated cyber-attack began, erasing Va-Voom!’s considerable credibility in a matter of minutes.

Scenario_MidnightBlitz

Here’s how it unfolded.

At five minutes to midnight, the websites of 10 of the largest retailers that sold on the Va-Voom! site went down. The retailers were so in the dark about what had happened to them that it took hours to put together that the source of the attack was coming from within Va-Voom!’s vaunted information technology system.

Precisely at midnight, unidentified hackers used the stolen e-mail addresses of the 10 retailers’ customers to send Trojan Horses to the personal computers of millions of online shoppers.

The customers didn’t need to click on the e-mails or download attachments to empower the Trojan Horses. After a mere half hour in their inboxes, the e-mails activated a cyber-locking mechanism that shut the users out of their own computers. The only visible content on their screen was the logo of the retailer whose customer information was stolen.

Angry consumers, shut out of their personal computers, pick up their handheld devices to vent their frustration in instant messages and Tweets aimed at the retailers whose logos were frozen on their now-useless computer screens.




Several of the affected companies went public within hours with their conviction that the Trojan Horses that caused so much havoc emanated from the Va-Voom! network.

“Are you seeing this?” said David Cohen, the equally miffed general counsel for one of the retailers, on a phone call with his law school buddy Paul Vitez, as they tried to sort out the hell that had broken loose.

“Yes I’m seeing it,” said Vitez.

Vitez, normally a man of action, but temporarily flummoxed, became as passive as any teenager with a handheld device in their hand as he sat, scrolling through the Tweets and Facebook posts that were savaging the retailers and Va-Voom!

“What are you doing?” Cohen said impatiently when Vitez fell silent.

“Are you playing with your iPhone? We have a serious situation here, Paul!” Cohen said.

“I’m not playing with my iPhone!” Vitez shouted back before putting down his mobile device and trying to regain control of his emotions.

“I know we have a problem David, I know we do,” Vitez said.

But all Vitez could do beyond that was run his hands through his hair, temporarily at a loss as to exactly what to do next.

On the afternoon of December 1, the New York Times published an online story, featuring quotes attributed to Wall Street analysts from the technology and retail sectors, estimating that damage to home computers and lost online retail sales from the coordinated and ongoing cyber attack could potentially exceed $1 billion.

Poll Question

Does your company have in place a crisis management and response plan in the event of a cyber-attack?

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Poll Question

If yes, how often is the plan tested?

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Black Monday and Beyond

In the aftermath of what history and newspaper editors and writers would record as “Black Monday,” Vitez and the rest of the Va-Voom! team tried to take stock of their losses and rally themselves into a recovery. They had a very hard and very expensive road ahead of them.

Scenario_MidnightBlitz

Paul Vitez had used the millions accorded to him to create Va-Voom’s “prison, not a castle” approach to cyber defense and he had employed that money in an admirable and innovative fashion.

But it was in a meeting with chief risk officer Steve Francis, CFO Marabel Kelly and Va-Voom!’s technology and general liability broker Brandon Fikes that Paul Vitez came to a better, albeit painful understanding about the best allocation of capital in the quest to manage risk.

The most immediate pain that Va-Voom! was feeling were notices from five attorneys general that investigations into the Black Monday breach were underway.

‘Well, the good news is that your regulatory defense is covered, as is your first party business interruption,” Fikes said.

“Great,” Vitez said. “What else?”

Steve Francis glanced at Vitez out of one corner of his eye. He felt the pain of the losses to the company as badly as anyone, but he couldn’t help but take a bit of perverse pleasure in the discomfort of Vitez, whose arrogance, in Francis’ estimation, was going to have significant consequences, consequences that could be measured in millions of dollars.

“The rest is somewhat of a mixed bag, unfortunately,” Fikes said.

“Go on,” said Vitez who shot Francis a quick sharp look, causing Francis to turn away quickly, lest his inner thoughts become outwardly visible.

“You had some third party liability coverage, but I don’t think it’s going to be enough to cover the losses of your business partners, not to mention the shoppers whose personal computers were damaged by this event,” Fikes said.

“How much …” Vitez managed to get out before Steve Francis stepped in.

“We could have multiples of millions in exposure here, Paul,” Francis said.

Vitez shot Francis another look but Francis diplomatically kept his mouth shut.

“I don’t think we’re ever going to get to the bottom of where this attack came from and who launched it,” said the CFO, Marabel Kelly.

“What’s your advice, Brandon, about spending money on forensics?” she asked.

“I think you spend it for a couple of reasons,” Fikes said.

“One, the cost is covered by insurance. But that’s not the best reason. The best reason is that you can use forensics to learn from the event and hopefully prevent anything else as bad as this going forward,” he said.

“All right,” Kelly said. “What else?”

“There’s reputation,” Steve Francis offered.

“Some say you can put a price on it, some say you can’t,” said Fikes.

“But one thing is for sure,” he said. “You had no coverage in place for that in any event.”

There was a pause, as the significance of that statement sunk in. In the extended, painfully awkward silence, Marabel Kelly shuffled the paperwork in front of her and shifted in her seat, visibly perturbed.

Within two weeks of that difficult conversation, the pain intensified for Paul Vitez and Va-Voom! Class action lawsuits were filed on behalf of the millions of home-computer owners who alleged pain and suffering in connection with the hassle of credit card replacement and property loss from their now-useless computers.

The 10 retailers affected, now known colloquially and to their ongoing irritation as the Black Monday Ten, also filed suit.

With Va-Voom!’s uninsured losses building from the millions to the tens of millions, Paul Vitez, once a magazine cover boy, resigned his position.

Poll Question

How much thought have you given to the third-party liability consequences of a cyber-attack on your system or on the systems of one of your business partners?

View Results

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Bar-Lessons-Learned---Partner's-Content-V1b

Risk & Insurance® partnered with XL Group to produce this scenario. Below are XL Group’s recommendations on how to prevent the losses presented in the scenario. These “Lessons Learned” are not the editorial opinion of Risk & Insurance®.

1. Have a crisis management response plan in place – The consequences of a cyber-attack are too expensive and too damaging for companies not to have a clear idea how they are going to respond in the event their services, or the services of their business partners are interrupted.

2. Understand your risk profile – Different companies have different cyber-risk profiles depending on their industry. Understanding your cyber-risk profile and working in conjunction with an agent and underwriter to map out the best coverage is a crucial step in avoiding being underinsured or paying too much for coverage you don’t need.

3. You are next – The realm of cyber-security and cyber-attacks is one area where an “it can’t happen here” mentality could be catastrophic. The chilling fact of the matter is that the most well-financed companies with the most sophisticated cyber defenses are vulnerable.

4. Get help – Whether it be through your insurance coverage or some other funding mechanism, find and connect with the consultants you need to help you understand the threat and how you can protect yourself. This risk environment is changing day by day and no one can afford to be content with the status quo.

5. Enforce your IT policies – Having sensible IT policies in place to minimize the potential for an attack is not enough. Companies must be proactive in seeing that employees take seriously company rules and standards on data encryption, and the use of personal devices in the workplace or in connection with company networks.

Additional Partner Resources

XL Group Cyber Product Sheet

John Coletti, Underwriting Manager of Cyber Liability, discusses cyber coverage options.


Dan Reynolds is editor-in-chief of Risk & Insurance. He can be reached at dreynolds@lrp.com.
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Sponsored: Liberty Mutual Insurance

Construction’s New World

The underwriting of construction risk is undergoing a drastic change, one that may take many years to resolve.
By: | November 3, 2014 • 5 min read

Get off a plane at Logan Airport and cross the harbor toward Boston and you will see construction cranes, a lot of them.

Grab an Amtrak train from Philadelphia into New York and pulling into Penn Station, you will see more construction cranes, many more of them. The same scene repeats in Denver, Los Angeles, San Francisco and Chicago.

All that steel and cable in the skyline signifies a construction industry that is growing again, after having the rug pulled out from under it in the Great Recession of 2008-2010.

The cranes these days look the same as cranes looked in 2008, but the risk management and insurance environment in construction is anything but the same now.

A variety of factors are now in play that have drastically changed construction risk underwriting, according to Doug Cauti, a senior vice president and chief underwriting officer with Boston-based Liberty Mutual’s construction practice.

Doug Cauti characterizes the current construction market.

Talent and Margins

For one thing, according to Cauti, the available talent pool in construction is nowhere near what it was pre-recession.

“When the economy went into its downturn, a lot of talent left the business and hasn’t returned,” Cauti said.

Cauti said recent conversations with large contractors in Ohio and Pennsylvania confirmed once again that contractors are facing a workforce that is either aging or very inexperienced. That leads to safety management and project quality concerns at just the moment in time that construction is rebounding.

Doug identifies one of the top risk management issues facing construction firms today.

Workers compensation risks in construction, already a problematic area, are seeing an impact from that dynamic.

Contractors are also facing much more competition. In the past, contractors might have bid on 10 jobs to get one, now they have to bid on 50 or 60 jobs to get one. That’s putting pressure on margins.

“There are a lot of contractors out there competing for business,” Cauti said.

“Margins are going up but not at the same rate as the industry’s recovery,” he added.

Financing and Risk Transfer

Another factor impacting the way construction risk is being underwritten is the size of projects and the way they are being financed. Construction’s recovery from the recession might be slow and steady, but the size of projects requiring risk management and insurance has increased substantially.

In 2010, there were 85 projects under contract nationally that were worth $1 billion or more, according to Cauti. One year later, the percentage of projects of that value or higher had grown by 30 percent, and the trend continues.

A lot of those projects are design-build, a relatively new approach to construction that Liberty Mutual has grown comfortable underwriting over the years. But design-build is still an additional complication, blurring the traditional lines of responsibility.

SponsoredContent_LM“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery.”
– Doug Cauti, Chief Underwriting Officer, Liberty Mutual National Insurance Specialty Construction

Given the funding demands of these much larger and more valuable projects — many of them badly needed public sector infrastructure improvements — public-private partnerships, otherwise known as P3s, are now coming into vogue as a financing option.

But deciding how risk should be allocated, underwritten and transferred in this new arrangement between contractors, the state, and private partners is a relatively new and untested science.

As a thought leader in the underwriting of the design-build approach – and the more traditional design-bid-build – Cauti said construction experts within Liberty Mutual are growing their knowledge to stay in step.

“We did it when the growth in contractor-controlled insurance programs happened, we did it with the evolution in design-build and we’re laying the groundwork to be a thought leader in public-private partnerships and integrated project delivery,” he said.

That means attending relevant industry conferences like the annual IRMI Construction Risk Conference where Liberty Mutual has maintained a significant presence, and engaging in dialogues with contractors and government officials, and maintaining clear and active lines of communications with brokers.

Doug discusses emerging approaches to construction.

Legal and Regulatory

Another change that is creating challenges for construction risk underwriting, according to Cauti, stems from what’s happening in United States courtrooms.

Across the country, how a court interprets coverage can vary widely, especially in the area of construction defect.

“In the past, many jurisdictions viewed construction defect simply as shoddy workmanship and they had to go back and redo it,” Cauti said.

But now, on a state by state basis, courts are ruling that a construction defect is an accident under certain circumstances that may be covered by a contractor’s general liability policy.

In 2014 alone, according to Cauti, Supreme Courts in West Virginia, Connecticut and North Dakota ruled that construction defects can sometimes be considered accidents.

Cauti said doing business with a carrier that pursues contract clarity whenever possible – and that possesses an experienced claims team that can navigate the wide variety of state interpretations – is absolutely essential to the buyer.

Having claim teams not only dedicated to construction but also to construction defect, adds a lot of value to a carrier’s offering.

Doug outlines another top risk management issue facing construction firms in today’s booming market.

Now, as never before, contractors are relying on experienced construction insurance teams to help them address these complexities.

Insurers need to have the engineering expertise to analyze a project, to make sure the right contracting team is in place and to insure that risk exposures are being properly assessed. Another key in a construction insurance team, according to Cauti, is the claims department.

A Strategic Approach

The legal and financing changes that are taking place in the construction market, from a risk transfer standpoint, aren’t going to get ironed out overnight.

Cauti said it could be 10 years until the construction and insurance industries fully understand the complications of public-private partnerships and integrated project delivery, these approaches gain traction, and the state-by-state legal decisions that are causing so much uncertainty can be digested.

In the meantime, an engaged, collaborative approach between carriers, brokers, contractors, and their financing partners will be necessary.

Doug discusses how his area can provide value to project owners and contractors.

For more information on how Liberty Mutual Insurance can help assess your construction risk exposure, contact your broker or Doug Cauti at douglas.cauti@libertymutual.com.

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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.


Liberty Mutual Insurance offers a wide range of insurance products and services, including general liability, property, commercial automobile, excess casualty, workers compensation and group benefits.
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