Cyber: The New CAT
Superstorm Sandy. The Joplin tornado. The Japanese earthquake and tsunami. California wildfires. 9/11. Catastrophes come in many forms. It is universally understood that despite our best efforts, disaster can strike due to forces beyond our control. Cyber threats are equally dangerous and diverse — and just as unstoppable.
Yet even as catastrophe risk management matures and scores of executives join the catastrophe conversation, the dragon known as cyber risk still sits in the middle of the board room, quietly smoldering.
In every industry and at every company size, cyber risk is a foundation-level exposure that every business must confront — one that must be viewed with the same gravity as a company’s property, liability or workers’ comp risks.
As recent as a decade ago, that might have been an overstatement. But not now. Technology and business are fundamentally linked. Computers and the Internet are the primary platform for communicating with customers and vendors, managing profits and expenses, paying employees, operating the machines that produce goods and provide services, and making sure that the end product gets into customers’ hands on schedule. Mobile technology and the Internet of Things are opening new channels, making technology a physical extension of ourselves, both personally and commercially.
“The entire economy is so reliant, in ways that we don’t even see, on technology and the storage, transmission and usage of data, both personal and for analytical purposes, that it’s fundamental to almost every sector,” said Oliver Brew, vice president for professional, privacy, and technology liability at LIU Liberty International Underwriters, the specialty line division of Liberty Mutual in New York.
Video: Computer security expert Mikko Hyppönen explains how he tracked down the creators of the first PC virus, which hit the net 25 years ago, and how to stop the new viruses of today.
That reliance is only going to grow. A January report by Forrester Research described software assets as more critical to business success than financial assets over the next 20 years.
“If you take a look at the public companies’ 10-Ks and publicly disclosed statements, what are they emphasizing that’s going to differentiate them from their competitors, increase sales, decrease costs and maximize efficiency? They focus on the use of technology and the use of information assets,” said Kevin Kalinich, global practice leader for cyber and network risk at Aon Risk Solutions.
With increased technology comes increased opportunity for attack. However, that reality didn’t get a lot of traction in the C-suite until the recent Target breach splashed it across world headlines. Even now, there are still some resting easy, confident that their IT teams have everything under control. Others assume cyber attacks are a threat largely confined to industries such as retail, health care and financial services — sectors with the most data to lose.
Small businesses, in particular, downplay the risk, said Jesse Bessler, an account executive at Lacher & Associates, of Souderton, Pa. “I think it’s that they just don’t understand the risk, and they think that [a cyber policy] is an add-on item they don’t need.”
Security experts, however, are trying to break through the wall of denial. Cyber attacks, they argue, are akin to massive storms or similar to the focused destruction of a tornado — something you can prepare for, but not something you can prevent. Despite firewalls and antivirus programs, experts say, cyber punches will eventually land inside every company.
To grasp the magnitude of the threat, it’s important to recognize that the driving forces behind cyber crime are vast, varied and as uncontrollable as any atmospheric or geologic force. The threat is now ubiquitous, and experts agree that while making an effort to reduce the risk of a breach is important, it is no longer possible to completely prevent cyber attacks.
“It’s like two identical cars in a mall parking lot,” explained Kurtis Suhs, vice president and national technology and privacy product manager for Ironshore. “If one’s locked and one’s unlocked, the bad guy’s going to go to the unlocked car. But if the bad guy really wants to get into the locked car, he will — it’ll just take longer.”
And yet, organizations keep brushing off the threat. That may be because “cyber risk” has become synonymous with data theft. If an entity does not have a significant aggregation of customer financial data, executives assume they won’t be targeted. The reality is that the true exposure is no longer just about credit card or Social Security data. Hackers have expanded their target list, adopted a more patient approach and found deep-pocketed sponsors, whether private-sector or state-sponsored, security experts said.
Sophisticated hackers are conducting long-term surveillance and probing for weaknesses they can exploit for financial gain, said David Remnitz, global and Americas leader of Ernst & Young’s forensic technology and discovery services business. “The end result here is the theft of highly valuable, internal information for significant financial gain,” he said.
While that could mean outright theft of trade secrets or confidential M&A data, it could also mean corporate sabotage, as in corrupting a decade of research and development results or putting competitors out of business. Imagine a market where most of the players used one primary vendor as a source for a key ingredient. An organization could contract with a lesser-used source for that ingredient, then disrupt the operations of the primary vendor via a denial-of-service attack or other type of malware, leaving the rest of the market scrambling for suppliers.
The potential for lost business and liability claims could be devastating for the affected companies. Even those with solid business continuity plans in place could still take heavy hits from the reputational fallout.
“A large company might be able to absorb that risk. A small company can’t,” said Elissa Doroff, a vice president and senior advisory specialist in Marsh’s network security and privacy practice in New York.
To date, breaches have largely been limited to individual companies, but the potential for larger events looms. One concern centers on cloud companies, which could host data for hundreds of businesses. A data breach or network interruption, or the physical destruction of a cloud-service data center could wreak larger havoc on the economy.
“That’s a potentially catastrophic loss,” said Doroff.
The sky’s the limit at this point. Criminals are capable of disrupting a multinational corporation, a transportation or logistics network, a health care system, an entire industry or even an entire region, creating havoc and leading to economic losses in the millions or billions — in many situations even putting lives at risk.
Keep in mind that those with ill intent don’t even need to have an IT background — the proliferation of hackers-for-hire means that anyone intent on doing damage can do so if their pockets are deep enough.
That said, it probably wouldn’t take a well-funded ring of genius-level hackers and a sophisticated attack plan to paralyze the average organization. Three years ago, the U.S. subsidiary of Shionogi, a Japanese pharmaceutical firm, suffered a devastating cyber attack that deleted the contents of 88 computer servers, crippling the company’s operations for several days, disabling its email, BlackBerry servers, order-tracking system, and financial management software. The attacker? A former mid-level employee, working from a public
Wi-Fi network at a nearby McDonalds, calmly sipping coffee while bringing Shionogi to its knees.
An Enterprise Approach
Even organizations that have never been affected by a catastrophe generally do not question the need for CAT planning. At the very least, most probably have a written evacuation plan in place and enough insurance to cover the potential physical damage of a storm. The smartest also address the whole picture from a supply chain and business continuity standpoint, and may have even considered questions about how to manage any reputational damage related to interruption of service to customers.
Cyber exposure should be approached in much the same way. It starts with engineering out the risk to whatever extent possible. If your roof is old, for instance, replacing it may be a way to ensure the building is more likely to stay intact if it’s battered by a storm. The cyber equivalent might be replacing old servers or upgrading any existing automated intrusion detection system. Security experts stress, however, that cyber risk is not an IT exposure, it’s an enterprisewide exposure. Therefore vulnerabilities need to be identified across an entire organization, with policies and procedures modified accordingly.
A comprehensive, enterprisewide disaster plan can also go a long way toward helping companies minimize the damage sustained in the event of a cyber attack. For every function of an organization, management needs to ask hard questions about how a cyber attack could disrupt that function, and what kind of back-up plan each department would need. Do you have a way to contact customers and suppliers if your email goes down? Do you have a crisis communication plan for alerting the public about how you’re handling the situation? Are your records backed up and accessible through a secure third-party?
Increasingly, organizations will rely on insurance to ensure their survival after a cyber event. In a February survey by BAE Systems, nearly 30 percent of companies said they expected the cost of a cyber attack to exceed $75 million. Another 20 percent expected the cost to fall between $15 million and $75 million.
“There’s an expectation that this could have an extremely material effect on business performance, and that’s a risk they look to hedge,” said Paul Henninger, global product director for BAE Systems Applied Intelligence, a business unit of BAE Systems.
Taking a realistic approach to cyber attacks could improve underwriting of the risk, he said. Just as carriers evaluate whether clients are prepared for a CAT-5 hurricane, knowing some damage is likely, they could determine whether clients are ready for a cyber storm.
“You can’t make it go away, but you can minimize the impact on the bottom line and customers and reputation,” he said.
Complete coverage on the inevitable cyber threat:
Risk managers are waking up to the reality that the cyber risk landscape has changed. Every sector must prepare to withstand the storm.
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.
An Electrifying Threat. There is a very real possibility hackers could devastate the nation’s power grids — for a potentially extended period of time.
Heading Off ‘Cybergeddon’. Experts say resistance is futile, but resilience is paramount.
Risk Technology: Risk Managers Lead from Within
This year marks my twentieth in the risk management field. Now I would never call myself a risk manager. Far from it: I’m a computer geek, and proud of it. Today we refer to the Internet, Cloud, Mobile and Big Data, but I’ve been working with technology my entire life. So much has changed in those twenty years. Networking computers together was rudimentary and extremely limited when I started. Now everything, and everyone, is interconnected, and that has changed everything.
That interconnectivity has allowed organizations to move away from the isolated, siloed processes of the past, and produced dramatic changes in the way we conduct our business and our lives. I’ve watched risk management evolve from a department called upon primarily when things go wrong, to a pervasive philosophy for running a successful business. Fewer and fewer risk managers I speak to work in isolation, reacting to claims as they come in. Rather they are a collaborative lynchpin to manage risk. They don’t wait for bad things to happen. They proactively put safety programs in place, analyze loss data and make their organizations more risk-aware. They know an enormous amount about the inner workings of their organization, its suppliers, distributors, vendors and team members. This is a fundamental transition from a middle management, administrative function, to an executive level function that is key to the organization’s success.
But risk managers are increasingly finding that email and spreadsheets are clumsy, inefficient, and ultimately create obstacles to managing risk throughout their company. With the speed and global reach of business, when even ‘local’ businesses rely on a far-flung supply chain, yesterday’s technology introduces risk, inefficiencies and increased levels of error. Today’s business demands technology that facilitates decisions for tomorrow’s business challenges. Organizations need a platform – a platform that provides secure, efficient and consistent methods of communicating risk-related events and data. Fortunately this need comes at a time when we have a convergence of technologies that can make this vision a reality.
This is a fundamental transition from a middle management, administrative function, to an executive level function that is key to the organization’s success.
Just imagine running your business on technology of twenty years ago. Sending paper memos (when CC referred to a literal ‘carbon copy’), using a phone tethered to your desk, taking delivery of policy documents in hard copy – oh wait, they still do that. Would that put your business at a competitive disadvantage? Of course it would – and risk management would suffer too.
Risk management no longer has to take a back seat to other parts of the organization. Quite the opposite. By leveraging commercial cloud platforms, the pervasiveness of the Internet and the interconnectivity of everyone and everything, the risk management team can be the most modern, forward-looking part of the company. Risk management has become the bellwether of change – actually bearing the standard for technology-enabled collaboration and productivity across the organization. Imagine that.
Using Data to Get Through Hail and Back
4,600 hailstorms have rained down on the U.S. as of the end of July according to the National Oceanic and Atmospheric Administration. And these storms have left damage behind, cracking unprotected skylights, damaging exterior siding, dimpling rooftops and destroying HVAC systems.
While storm frequency is almost on par with last year’s 5,400, the rest of the picture isn’t quite the same. For example, the hail zone seems to be shifting south. San Antonio, Texas, a “moderate” hazard hail zone area, typically sees four or five hail storms a year, on average. Year to date, more than 30 storms have been reported. Overall, Texas has suffered nearly 20 percent of all hail storms this year.
Liberty Mutual’s Ralph Tiede discusses the risk hail poses to large commercial property owners.
The resulting damage is different too, with air conditioning (AC) units accounting for more than a third of the insurance industry’s losses, a greater proportion than in previous years. “In some cases, we’ve seen properties that sustained no roof damage but had heavily damaged AC systems. This may be a result of smaller hail stone size coupled with high winds,” noted Ralph Tiede, Vice President of Commercial Insurance and Manager of Property Risk Engineering at Liberty Mutual.
Despite the shifting trends, however, these losses are largely preventable if commercial property owners understand their exposures and take steps to mitigate them. By partnering with the right insurer, a company can gain access to the industry-leading resources and expertise to make it happen.
Understanding the Risk through Data
A property owner might know that his property is located in an area prone to hail, but could underestimate the extent of damage a storm could cause. Exposed skylights, solar panels, satellite dishes and other roof-mounted equipment can translate to serious losses.
Three trends that have emerged this hail season.
This is where Liberty Mutual’s property loss control engineers offer critical guidance for customers with large property exposures.
“Our property loss control engineers go out and inspect locations to develop loss estimates,” said Tiede. “They’re looking at the age and condition of the roof, the material it’s made of, and whether equipment is exposed or if there are adequate safeguards in place.”
Liberty Mutual can combine this detail with the hail data it has collected for more than 14 years and use this extensive library to help customers understand their exposures. The company’s proprietary hail tool looks at customer-specific factors, such as roof type, age, condition and geocodes, to better identify potential losses from hail. The tool provides a more detailed view of hail exposure on a micro level, as opposed to more traditional macro views based on zip codes.
“This way, we’re not just looking at a location’s exposure, we’re looking at an account’s cumulative hail exposure and providing a better understanding of where the risk is concentrated,” Tiede said.
Having a good understanding of a company’s specific exposure helps the broker, buyer, and insurer develop an effective insurance program. “Two customers may be in the same area, but if one’s building has a hail resistant roof, protected skylights, and hail guards for HVAC equipment and the other’s has unprotected sky lights and no hail guards or screens on rooftop equipment, they are going to have different levels of exposure. In both scenarios, we can design an insurance program that fits the customer’s situation and helps control the total cost of property risk,” said Brent Chambers, Underwriting Consultant for National Insurance Property at Liberty Mutual.
A Liberty Mutual property loss control engineer consults with the customer on ways to reduce or mitigate the exposure from hail so that the customer can make an informed decision as to where to deploy capital. “It’s not just about protecting a building’s roof and rooftop equipment. Roof damage can lead to extensive water damage inside a building and in some cases disrupt service, both of which can be costly for a business. By focusing on locations with the most exposure, a risk manager is better able to mitigate future losses,” said Tiede.
Actions commercial property owners can take to mitigate the risk of hail-related damage.
Liberty Mutual property loss control engineers also provide recommendations specific to each location. “We know that hail guards work, so we encourage clients to use those to protect HVAC equipment,” said Ronnie Smith, Senior Account Engineer for National Insurance Property at Liberty Mutual. “Condenser coils in air conditioning systems are fragile and easily damaged, and units don’t necessarily come with built-in protection. It’s important for property owners to take this step proactively to prevent a loss.”
The average cost to fix a condenser coil is $500, but replacing a coil can run at least $500 per ton of cooling, a measurement of air conditioning capacity that refers to the amount of heat needed to melt a ton of ice over a 24-hour period. As one ton of cooling typically covers about 250 square feet of interior space, replacement costs can quickly add up.
Replacing an entire AC unit can run more than $1,000 per ton of cooling. In a 250,000 square foot property, the replacement could easily reach $1 million. Given the increase in hail-related AC damage this year, these are numbers worth knowing.
Other risk mitigation recommendations include regular roof maintenance, such as inspections and repairs to small damages like blisters and installing protective screens over skylights.
“If a roof needs replacing, we also suggest using materials that have been tested and approved by an independent certification laboratory and are durable enough to fit the location’s exposures,” Tiede said. “The last thing a commercial property owner wants is to replace a roof again six months after it’s installed. Experience has shown that ballasted-type roofs are the most resistant to hail damage.”
Using Data to Develop Solutions
When a property owner has an understanding of the size of its exposure and potential losses, it is better able to work with its agent or broker and insurer to develop an insurance program to manage and mitigate potential risks.
“The data and advice we provide help clients focus on the largest risks and better mitigate that exposure,” Smith said. “The more data you have, the more you can understand your risk on a granular level and manage it.”
This data-driven approach to preparedness makes Liberty particularly well-suited to serve large commercial properties with multiple locations in high risk areas.
Prices for roof and air conditioning repairs and replacements have risen over last year, Tiede said, and are likely to grow more expensive as older equipment becomes obsolete. Property owners will be forced to buy newer, pricier replacements than perhaps they had originally planned for.
And if this year’s storm trends are any indication, hail is sometimes an unpredictable foe.
Amidst these shifting trends, the value of an insurer’s expertise in identifying, mitigating and managing hail exposure will be immeasurable to large commercial property owners.
For more information about Liberty Mutual’s commercial property coverage, visit https://business.libertymutualgroup.com/business-insurance.
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.