United States: Cybersecurity Awareness Month: Visits From The Ghosts Of Claims Past And Claims Future

Last Updated: October 6 2016
Article by John C. Pitblado

Cybersecurity awareness month is nigh upon us again, and thus perspective is in order. 2016 brought us the first collection and analysis of the nascent claims history of the burgeoning cyber-insurance market. On August 27, 2016, the National Association of Insurance Commissioners (NAIC) released its "Report on the Cybersecurity Insurance Coverage Supplement," which provides helpful analysis of NAIC's first data cull from insurers writing various forms of cyber coverage. The data shows that identity theft remains the most common form of risk addressed by cyber-coverages in their various forms. It also shows that much of the coverage is likely being provided on a surplus lines basis by non-admitted insurers, as policyholders continue to look for creative ways to manuscript coverage for their particular cyber-security concerns. Whether through admitted insurers, stand-alone policies, supplements to other standard coverages, or otherwise, all signs point to a continued increase in premium dollars spent on cyber coverage. But what might the future of cyber claims look like where computers and technology are becoming so ingrained in our lives, that hacking or network outages could result not only in economic harm, but even bodily injury? Companies in the technology, energy, and healthcare sectors need to take the issue seriously as society continues to integrate remotely accessible and operable devices in our homes, cars, and bodies.

The Ghost of Claims Past

In order to gain a better understanding of the current market for cyber coverages, the NAIC added a supplement to the Property and Casualty Annual Statement, requiring insurers writing cyber coverage of any kind to provide information about their claims experience and other data. The first year the supplement was required to be filed was with the 2015 Annual Statement filed in April of 2016. The supplement required insurers to report:

  • Number of claims reported (First Party & Third Party)
  • Direct premiums written and earned
  • Direct losses paid and incurred
  • Adjusting and other expenses paid and incurred
  • Defense and cost containment expenses paid and incurred
  • Number of policies in-force (claims-made and occurrence)

NAIC's Cybersecurity Task Force analyzed the data, and prepared a summary of its findings and identified difficulties in data collection that it will seek to improve upon in future analyses.

Key findings include the following about the size and shape of the market:

  • Admitted insurers wrote approximately $1.5 billion in premiums in 2015.
  • Of the $1.5 billion total, approximately one third was attributed to stand-alone cyber policies.
  • 48 insurer groups (116 insurers) reported writing stand-alone cyber policies.
  • In the stand-alone space, the top ten insurers wrote 78.7% of total U.S. market with the top 20 writing 95.8% of the market.
  • About half of the more than 500 insurers surveyed wrote cyber in some form, mostly as an add-on or supplement to existing coverages.

Regarding claims, the data is limited, but NAIC summarized its findings as follows. Loss ratios for stand-alone cybersecurity insurance ranged from zero to over 500%. From the regulator perspective, the wildly different loss experience was unsurprising, given the uncertainties in the market, and the fact that a single loss can bring with it, as NAIC describes, "an element of catastrophe exposure." As NAIC noted, a zero loss ratio could be indicative of good underwriting and the careful selection of risk, or simply good luck. The insurer that reported the 500% loss ratio was an insurer group with less than $400,000 in written premium. This likewise could be attributable to underwriting, or simply bad luck, given that in 2016 the average cost of a data breach is $4 million, up 29% since 2013.

Other notable findings by NAIC include the fact that approximately 82% of the third-party liability coverages in stand-alone policies were written on a claims-made basis, meaning only claims made during the policy period are covered, regardless of when an injury may have occurred. As NAIC notes, writing claims-made coverage provides insurers with more certainty, as they can avoid possible long-tail exposure that could haunt them deep into the future. This is a plus from a solvency risk perspective, but writing on this basis is, in effect, a limitation on coverage, and one that policyholders must keep in mind.

The report notes that identity theft coverage is the most frequently written, with some 16.6 million reported policies including identity theft coverage as part of a package policy. Only about 500,000 stand-alone policies were written specifically for identity theft. But these coverages do not account for the bulk of premium, as they are mostly written for consumers, with an average cost of $42 per policy.

The major limitation in NAIC's report is the lack of data from what NAIC estimates to be the bulk of the insurers writing cyber coverage: non-admitted, or "surplus lines" insurers. NAIC estimates that those insurers may account for more than half of the market, given some estimates that the market currently exceeds $3 billion in premiums annually for U.S. companies.

So, as NAIC notes, the first reporting gives a baseline, and has allowed NAIC to identify what types of information it will need to collect, and from whom, in order to further develop a picture of what the claims/loss history is looking like.

The Ghost of Claims Future

While the ghost of claims past may be scary (500% loss ratio, oh my!), particularly given that we still don't have a clear picture of it, what might the future of cyber claims look like? One area that is drawing increasing attention, and no doubt vexing underwriters, is the possibility of opening cyber coverages up to bodily injury claims.

Many stand-alone cyber policies simply exclude bodily injury and property damage claims. After all, there is little risk of bodily injury in the type of event cyber policies are currently meant to cover, such as media liability and network interruptions. And policyholders may simply rely on their standard general liability coverages when they hear "bodily injury." But what if the bodily injury is caused, not by some negligence in failing to clear the walkway of ice and snow, but rather negligence in failing to prevent a hacker from jamming a pacemaker, commandeering a Jeep, or failing to prevent a network outage from affecting critical patient care in a hospital?

Famously, a hacker named Barnaby Jack shined a bright light on these issues at one of the prominent "hacker" conferences where he attained star status before his untimely (and some would say, mysterious) death. Not content with such parlour tricks as causing ATM machines to spit out all their cash on demand, Jack made headlines in 2011 at the McAfee FOCUS 11 conference in Las Vegas, by demonstrating how he could cause an insulin pump to dispense lethal doses of insulin into a test dummy. He followed that up in 2012 with a demonstration of how to assassinate a person by hacking their pacemaker (this was not a new concept, as former Vice President Dick Cheney revealed that he ordered doctors to disable the wireless functionality of his pace-maker to prevent exactly this type of incident). Jack was scheduled to give a demonstration in 2013 in Las Vegas showing how to hack heart implants from 50 meters. He died of a drug overdose in his hotel about a week before he was scheduled to give that presentation, but not before drawing attention to one of the more frightening implications of cybersecurity in a world where internet-connected devices are multiplying exponentially.

A recent white paper by insurance broker Arthur J. Gallagher and Co. notes the FDA's concerns in this space, as it has begun to address cybersecurity in medical devices with draft guidance on design considerations for manufacturers of interoperable devices at the pre-market stage, as well monitoring and remediation in the post-market stage for hospitals and others utilizing the data functionality of these devices in the delivery of patient care.

So who will pay for future products liability suits or medical malpractice suits that arise from bodily injury caused by hacking, network outages, or other cyber events? We may see a redux of the birth of the current cyber market: companies first looked to their CGL carriers for data breach and other cyber claims. But those policies weren't underwritten with those exposures in mind, and insurers began to exclude them specifically. Given that many of the cyber policies designed to fill that gap specifically exclude bodily injury claims, insurers and policyholders alike will need to consider how such events might be covered in the future. These issues can affect companies (and their vendors in the supply chain) that manufacture or service products like baby monitors, "smart" cars, home security systems, and internet-connected medical devices, as the market for such technology continues to expand.

But to be sure, bodily injury claims of the future will not be confined to icy walkways and car accidents, as our bodies and health become interdependent on products for which cybersecurity is as important as physical security in terms of critical functions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Smith Gambrell & Russell LLP
Miller Friel
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Smith Gambrell & Russell LLP
Miller Friel
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions