[Senate Hearing 114-171]
[From the U.S. Government Publishing Office]
S. Hrg. 114-171
EXAMINING THE EVOLVING CYBER
INSURANCE MARKETPLACE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON CONSUMER PROTECTION,
PRODUCT SAFETY, INSURANCE,
AND DATA SECURITY
OF THE
COMMITTEE ON COMMERCE,
SCIENCE, AND TRANSPORTATION
UNITED STATES SENATE
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
__________
MARCH 19, 2015
__________
Printed for the use of the Committee on Commerce, Science, and
Transportation
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SENATE COMMITTEE ON COMMERCE, SCIENCE, AND TRANSPORTATION
ONE HUNDRED FOURTEENTH CONGRESS
FIRST SESSION
JOHN THUNE, South Dakota, Chairman
ROGER F. WICKER, Mississippi BILL NELSON, Florida, Ranking
ROY BLUNT, Missouri MARIA CANTWELL, Washington
MARCO RUBIO, Florida CLAIRE McCASKILL, Missouri
KELLY AYOTTE, New Hampshire AMY KLOBUCHAR, Minnesota
TED CRUZ, Texas RICHARD BLUMENTHAL, Connecticut
DEB FISCHER, Nebraska BRIAN SCHATZ, Hawaii
JERRY MORAN, Kansas EDWARD MARKEY, Massachusetts
DAN SULLIVAN, Alaska CORY BOOKER, New Jersey
RON JOHNSON, Wisconsin TOM UDALL, New Mexico
DEAN HELLER, Nevada JOE MANCHIN III, West Virginia
CORY GARDNER, Colorado GARY PETERS, Michigan
STEVE DAINES, Montana
David Schwietert, Staff Director
Nick Rossi, Deputy Staff Director
Rebecca Seidel, General Counsel
Jason Van Beek, Deputy General Counsel
Kim Lipsky, Democratic Staff Director
Chris Day, Democratic Deputy Staff Director
Clint Odom, Democratic General Counsel and Policy Director
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SUBCOMMITTEE ON CONSUMER PROTECTION, PRODUCT SAFETY, INSURANCE, AND
DATA SECURITY
JERRY MORAN, Kansas, Chairman RICHARD BLUMENTHAL, Connecticut,
ROY BLUNT, Missouri Ranking
TED CRUZ, Texas CLAIRE McCASKILL, Missouri
DEB FISCHER, Nebraska AMY KLOBUCHAR, Minnesota
DEAN HELLER, Nevada EDWARD MARKEY, Massachusetts
CORY GARDNER, Colorado CORY BOOKER, New Jersey
STEVE DAINES, Montana TOM UDALL, New Mexico
C O N T E N T S
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Page
Hearing held on March 19, 2015................................... 1
Statement of Senator Moran....................................... 1
Statement of Senator Blumenthal.................................. 3
Statement of Senator Blunt....................................... 28
Statement of Senator Klobuchar................................... 29
Witnesses
Ben Beeson, Vice President, Cyber Security and Privacy, Lockton
Companies..................................................... 4
Prepared statement........................................... 6
Catherine Mulligan, Senior Vice President, Management Solutions
Group, Zurich (North America).................................. 8
Prepared statement........................................... 9
Ola Sage, Founder and CEO, e-Management.......................... 13
Prepared statement........................................... 14
Michael Menapace, Counsel, Wiggin and Dana LLP, and Adjunct
Professor of Insurance Law, Quinnipiac University School of Law 18
Prepared statement........................................... 20
Appendix
Response to written questions submitted by Hon. Jerry Moran to:
Ben Beeson................................................... 39
Catherine Mulligan........................................... 39
Ola Sage..................................................... 40
EXAMINING THE EVOLVING CYBER INSURANCE MARKETPLACE
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THURSDAY, MARCH 19, 2015
U.S. Senate,
Subcommittee on Consumer Protection, Product
Safety, Insurance, and Data Security,
Committee on Commerce, Science, and Transportation,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10 a.m. in
room SR-253, Russell Senate Office Building, Hon. Jerry Moran,
Chairman of the Subcommittee, presiding.
Present: Senators Moran [presiding], Blunt, Blumenthal, and
Klobuchar.
OPENING STATEMENT OF HON. JERRY MORAN,
U.S. SENATOR FROM KANSAS
Senator Moran. Good morning, everybody. We are delighted
that we are here. I call this subcommittee hearing to order.
Let me first of all thank our witnesses for taking the time
to provide us with--I have read the testimony--very valuable
information on a topic that I think has not received much
attention. We are delighted to have you here and appreciate
your willingness to share with us.
I also want to thank our committee staff who worked hard at
arranging those witnesses and putting this hearing together.
The purpose of this hearing is to examine the state of the
cyber insurance market, identify challenges and opportunities,
and learn how cyber insurance may drive improvements to the
risk management culture at businesses that purchase those
insurance policies.
This is our second hearing on a broad topic of data
security, and to my knowledge, it is the first time, as I said,
that a hearing has ever been held on the cyber insurance
market.
American consumers and businesses face ongoing and serious
cyber threats. Just last week we learned of yet another. Every
time we have had a hearing there has been an announcement of a
data breach. May be a reason not to have another hearing.
A Washington state-based health insurance company notified
11 million customers that credit card numbers, Social Security
numbers, medical records, and other sensitive information may
have been compromised.
A data breach, as we know, is all too frequent, and has
become common in our digital lives.
One strategy for business to mitigate cyber or privacy-
related losses is to purchase cybersecurity insurance. While
some cyber related losses may be covered under a business'
general insurance policy, the increase of publicly reported
cyber incidents and data breaches have led insurers to begin
offering stand-alone policies to cover cyber related risks and
losses.
Cyber insurance policies vary greatly but increasingly new
policies are being developed to cover costs ranging from crisis
management and response to a data breach, personal or health
information, to business interruption or damage to critical
infrastructure systems from a cyber attack.
While an insurer's primary function is to mitigate
financial losses, not defend against cyber threats, cyber
insurance may be a market led approach to help businesses
improve their cybersecurity posture by tying policy eligibility
or lower premiums to better cybersecurity practices.
An example of this relationship is an automobile insurer
offering good driver discount to a customer who avoids
accidents or driving violations, providing an additional
incentive to a driver to be more cautious and attentive. The
insurance company also wins. Even though the premium they
receive may be lower, in the end, they have fewer claims to pay
out.
The cyber insurance market is one of the fastest growing
commercial lines of insurance, approximately 50 carriers now
offer stand-alone cyber policies, and the total written
premiums were between 1.5 and $2 billion in 2014. Some
estimates show that the market could grow as high as $5 billion
by the decade's end.
During last year, 2014, the number of clients at brokerage,
Marsh & McLennan, who purchased stand-alone cyber coverage
increased by 32 percent over 2013. Among their clients, the
highest take up rates for cyber insurance in 2014 were in
health care, education, hospitality, and gaming.
The challenges in the cyber insurance market exists due to
the difficulty of quantifying the exposure to cyber risk,
liabilities, and losses, the aggregation of losses due to the
interconnected nature of IT and the changing cyber threat
environment.
Several IT security firms are developing products and
assisting insurers in either identifying potential threats and/
or offering cyber products or services to better protect their
networks.
For instance, a startup named BitSite partners with Liberty
International Underwriters to externally analyze a company's
cybersecurity. In one case, BitSite helped discover a dormant
threat in a company's IT system, and the insurer was able to
work with the company to avoid the possible breach.
Another example in my home state of Kansas, Overland Park-
based risk analysts partner with AIG to provide security
products to some AIG insurance products.
This Congress considers cyber threat information sharing
legislation as well as a national data breach notification
standard.
There are lots of important questions about developing the
state of a private insurance market that come to mind. Today,
we will focus our attention on some of those key questions, and
I am confident today's expert panel can share their valuable
insights on these topics.
I would like now to turn to the Ranking Member, my friend
and colleague, the Senator from Connecticut, Senator
Blumenthal.
STATEMENT OF HON. RICHARD BLUMENTHAL,
U.S. SENATOR FROM CONNECTICUT
Senator Blumenthal. Thank you so much, Senator Moran. I
really appreciate your convening this hearing on a topic of
huge importance to the entire country, indeed, the world, and
certainly to my home state of Connecticut. I want to join you
in thanking our staff, but most especially the experts who have
come to be with us today.
This topic, I can tell you, is of tremendous interest to my
colleagues. I have spoken to them about this issue over the
last couple of days. We have a busy day today, so the
attendance here may not reflect that interest, but I can tell
you there is no topic more important than cybersecurity to the
U.S. Senate and maybe to our country.
At this moment, the Armed Services Committee, and I am a
member of that committee as well, is having a hearing on the
budget for our military cyber warfare activities in part. The
two are inextricably linked, the private security and our
national defense security.
As you well know, we are struggling now to deal with the
problems raised in both spheres, which are very closely linked.
Hartford, Connecticut is home to the Nation's oldest
continuously published newspaper, the Hartford Courant, but it
is also home to many of the world's biggest and greatest
insurance companies. It is known colloquially as the insurance
capital of the world. Some may dispute whether any place in the
world is an insurance capital these days because of their
multinational activities. Hartford, I think, has the longest
standing claim to that title.
We are a small state but we actually still rank number one
in total insurance jobs as a percentage of total employment.
I am particularly pleased to see one our nation's experts,
Michael Menapace, of Quinnipiac University joining us here
today. Thank you, Michael, for being here.
I am also happy to be here today to learn, and I really do
mean learn more about this issue. We all think we know a lot
about breaches because they are so common, as Chairman Moran
said, but each in many important respects is different from the
other, in its consequences and causes, and what can be done to
prevent these kinds of breaches.
That is the issue that brings us here today: how to prevent
them, how to insure against them, and how to use insurance as
an incentive, as a tool, to provide for stronger prevention.
The simple and stark fact is that the Internet was not
built for security. The Internet was not built to be secure. It
was not intended to be the commercial and financial backbone of
the post-industrial world. It was designed as an open system,
and it was based and still is based on anonymity, meant to be
used among a select group of Government officials and
university computer scientists.
Very sadly, it seems like this dynamic has in some ways
reinforced the picture we see every time we open the newspaper
to read of millions of consumer records stolen from major
retailers: Target, Neiman Marcus, Home Depot, Anthem.
Data breaches are hardly a new phenomenon. When I was
Attorney General of the State of Connecticut, we tried to deal
with them in terms of providing protections to consumers, and
consumers have been facing and paying for data breaches for
years.
Consumers are hit the hardest, but the growing threats of
cyber attacks and data breaches impair more than just our
consumers, and it is our critical infrastructure now that has a
huge risk, and has so much at stake. They are increasingly
hitting the bottom line of our major companies.
The question is whether insurance can play a role in
preventing these kinds of breaches, what kinds of insurance are
best designed to cover damages from security breach or cyber
attack, and why companies do not more commonly choose to have
cybersecurity insurance.
A lot of these companies cite its high cost, lack of
awareness about what it covers, uncertainty that they will
suffer a cyber attack as reasons for their decisions or non-
decisions to have insurance.
I am looking forward to the panel's testimony today to know
about what has been changing, the dynamics of this industry,
and what can be done to encourage the growth of this very
dynamic market, and ultimately increase its positive impact on
the security of consumers' sensitive information.
Thank you very much for being here today.
Senator Moran. Senator Blumenthal, thank you very much. Our
witnesses are Mr. Ben Beeson, Vice President for Cyber Security
and Privacy at Lockton Companies. Ms. Catherine Mulligan,
Senior Vice President of Management Solutions Group for Zurich,
North America. Ms. Ola Sage, CEO, e-Management, an IT firm from
Silver Spring, Maryland, and Mr. Michael Menapace, Counsel at
Wiggin and Dana, who also serves as Adjunct Professor of
Insurance Law at Quinnipiac University School of Law.
It is a good thing to have a polling organization so I know
how to pronounce the University's name.
Thank you all very much for being here. Mr. Beeson, we will
begin with your testimony.
STATEMENT OF BEN BEESON, VICE PRESIDENT, CYBER SECURITY AND
PRIVACY, LOCKTON COMPANIES
Mr. Beeson. Chairman Moran, Ranking Member Blumenthal,
distinguished members of the Committee, thank you very much on
behalf of Lockton Companies for the opportunity to testify
today.
My name is Ben Beeson. I am Vice President for Cyber
Security and Privacy at Lockton. Lockton is the largest
privately held independent insurance broker in the world. I am
based in the Washington, D.C. office where I advise clients on
a cyber risk management strategy that addresses crucially
people, processes, and technology.
Our clients face a substantial set of cyber threats today
that include criminal gangs, disgruntled employees, politically
motivated actors, and now even nation states.
Well-publicized attacks have sought to target and monetize
personally identifiable data and protected health information.
However, it is also commonly understood that the theft of
corporate intellectual property is a significant problem with
non-trivial impacts on innovation for companies and countries,
and companies also face incidents that can disrupt or destroy
information technology and other vital assets, even now
physical assets.
The key message I would like to convey today is this, we
believe that cyber insurance is an important market force that
can drive improved cybersecurity within companies but also
importantly thereby improve consumer protection and the nation
as a whole.
There is an important link there. It should not just be
seen as a financial instrument to transfer risk from one
balance sheet to another. As the cyber insurance market
develops, it will provide incentives for companies to
understand and better mitigate their risks.
For example, forward thinking companies invest in workplace
safety to reduce their Workers' Compensation costs, and in the
same way, sophisticated companies are investing in strong
cybersecurity. Those companies ultimately will experience fewer
losses and insurers will see fewer claims and the premiums will
be lower.
In addition, and importantly, simply just engaging in the
process of seeking cyber insurance coverage can also assist
businesses to develop the correct approach to mitigate risks.
It is no longer just the domain of the IT Department.
Cyber insurance can also act as a catalyst for driving an
enterprise-wide risk management approach. It can bring all the
relevant stakeholders together, in IT, Legal, Risk Management,
R&D, Finance, Human Resources, Communications, and perhaps now
most importantly, the Board itself.
So, do not view cyber insurance as just a commodity that
you may or may not see at the end of this process.
However, we are not there yet today. The cyber insurance
market is still young and developing. Companies today spend
about $2 billion annually on cyber insurance, a fraction of the
$1 trillion U.S. insurance market.
Lockton also sees the NIST Framework aligning hand in glove
with this enterprise risk management strategy. Working closely
with the Department of Homeland Security to support its
implementation, Lockton sees the Framework providing the tool
that is needed to help boards of directors understand in
layman's terms their current security, areas for improvement,
and desired future status.
As insurance brokers, we also advise directors and officers
on management liability, and we see that cyber risk has now
entered the governance dialogue. The NIST Framework has proved
immensely helpful in driving better board discussions.
Building on a public/private partnership, discussions are
ongoing with the Department of Homeland Security about the
possible formation of a data repository to house anonymized
enterprise loss information. The ability to access anonymized
loss data, shared between industry and government with
appropriate privacy protections, would accelerate the growth of
the marketplace, and crucially accelerate the ability of cyber
insurance to act as a market incentive for industry to invest
in cybersecurity.
In addition, Lockton, and we believe the industry as a
whole, would welcome the introduction of legislation that would
reduce barriers and incentivize organizations to share threat
indicators with government and each other while also protecting
individual privacy.
Thank you again for the opportunity to testify, and I will
be happy to answer any questions you may have.
[The prepared statement of Mr. Beeson follows:]
Prepared Statement of Ben Beeson, Vice President, Cyber Security and
Privacy, Lockton Companies
Chairman Moran, Ranking Member Blumenthal, distinguished members of
the Committee, thank you for the opportunity to testify today on behalf
of Lockton Companies.
My name is Ben Beeson and I am Vice President for Cyber Security
and Privacy at Lockton Companies. Lockton is the world's largest
privately held, independent insurance broker. I am based in the
Washington, DC, office, where I advise clients on a cyber risk
management strategy that addresses people, processes, and technology.
Our clients face a substantial set of cyber threats today that
include criminal gangs, disgruntled employees, politically motivated
actors, and now nation states. Well-publicized attacks have sought to
target and monetize personally identifiable data and protected health
information. However, it is also now well understood that the theft of
corporate intellectual property is a significant problem, with
nontrivial impacts on innovation for companies and countries, and
companies also face incidents that can disrupt or destroy information
technology and other vital assets.
We believe that cyber insurance is an important market force that
can drive improved cyber security for companies--and thus improve
protection to consumers and the Nation as a whole. It should not just
be seen as another insurance transaction. As the cyber insurance market
develops, it will provide incentives for companies to understand and
mitigate their risks.
For example, forward-thinking companies invest in workplace safety
to reduce their workers' compensation costs. In the same way,
sophisticated companies are investing in stronger cyber security, and
those companies ultimately will experience fewer losses, insurers will
see fewer claims, and their premiums will be lower.
However, we're not there today. The cyber insurance market is still
nascent and developing.
Cyber Insurance Market Today
It is estimated that more than 50 insurers domiciled mainly in the
U.S. and the Lloyd's of London marketplace provide dedicated cyber
products and solutions today. Buyers are overwhelmingly concentrated in
the U.S. with little take-up to date internationally. Annual premium
spend at the end of 2014 was estimated to be in excess of $2 billion
\1\ with the potential to grow to $5 billion.\2\ Total capacity (the
maximum amount of insurance available to any single buyer) is currently
at about $300,000,000. Cyber insurance first emerged at the end of the
1990s, primarily seeking to address loss of revenue and data-
restoration costs from attacks to corporate networks. However, the
underwriting process was seen as too intrusive and the cost
prohibitively expensive, and it was not until 2003, and the passage of
the world's first data breach notification law in California,\3\ that
demand started to grow.
---------------------------------------------------------------------------
\1\ The Betterley Report--www.betterley.com
\2\ The Cyber Liability Insurance Market 2015--Jim Blinn, Advisen.
www.cyberrisknetwork.com
\3\ California S.B.1386
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What Does Cyber Insurance Cover?
It is important to understand that insurers do not address all
enterprise assets at risk. The vast majority of premium spent by buyers
has sought to address increasing liability from handling personally
identifiable information (PII) or protected health information (PHI),
and the costs from either unauthorized disclosure (a data breach), or a
violation of the data subject's privacy. Insurable costs range from
data breach response expenses such as notification, forensics, and
credit monitoring to defense costs, civil fines, and damages from a
privacy regulatory action or civil litigation.
Insurers also continue to address certain first-party risks
including the impact on revenue from attacks on corporate networks,
extortion demands, and the costs to restore compromised data.
What Does Cyber Insurance Not Cover?
Theft of corporate intellectual property (IP) still remains
uninsurable today as insurers struggle to understand its intrinsic loss
value once compromised. The increasing difficulty in simply detecting
an attack and, unlike a breach of PII or PHI, the frequent lack of a
legal obligation to disclose, suggests that a solution is not in the
immediate future.
Much attention in the industry is now being paid to risks to
physical assets from a cyber attack. Much of the credit here must go to
the Federal Government for directly engaging the industry initially in
2013 as part of the creation of the NIST Framework and raising
awareness about the risks to critical infrastructure industries. In the
absence of actuarial risk modeling data, certain innovative insurers
and brokers have started to produce solutions that specially address
property damage, resultant business interruption loss, and bodily
injury from a cyber attack. However, it is early days, and major
challenges lie ahead in establishing significant market capacity as
well as addressing the current ambiguity embedded in legacy property
and casualty insurance policies.
How Do Insurers Underwrite Cyber Risks?
Historically, underwriters have sought to understand the controls
that enterprises leverage around their people, processes, and
technology. However, the majority of assessments are ``static,''
meaning a snapshot at a certain point in time through the completion of
a written questionnaire, a phone call interview, or a presentation. In
the wake of significant insurable losses in 2014 and early 2015 to the
retail and healthcare sectors in particular, a consensus is growing
that this approach is increasingly redundant. It is Lockton's opinion
that insurers will increasingly seek to partner with the security
industry to adopt a more threat-intelligence-led capability as part of
the underwriting process in the face of threats that continue to
evolve. The industry (as discussed later) will also increasingly seek
to partner with government to access industry loss data and analytics
capabilities.
What Is the Role of Cyber Insurance?
In the context of building enterprise resilience to counter
evolving cyber threats, insurance should not just be seen as a
financial instrument for transferring risk from one balance sheet to
another. Importantly, the actual process of seeking cyber insurance
coverage should also be viewed as the catalyst for driving an
enterprise-wide risk management approach, and ultimately an improved
security posture.
It can bring all relevant stakeholders together in IT, Legal, Risk
Management, R&D, Finance, Human Resources, Communications, and the
Board of Directors for example. Do not view cyber insurance as just a
commodity that you may or may not seek at the end of this process.
NIST Framework
In the same vein, Lockton also sees the NIST Framework aligning
hand in glove with this strategy. Working closely with the Department
of Homeland Security to support its implementation, Lockton sees the
framework providing the tool that is needed to help boards of directors
understand in layman's terms their current security posture, areas for
improvement, and desired future status. As insurance brokers who also
advise directors and officers on management liability, we can
acknowledge that cyber risk has now entered a governance dialogue, and
the NIST Framework has proved immensely helpful in facilitating the
discussion.
Conclusion--A Public/Private Partnership
Lockton, and we believe the industry as a whole, would welcome the
introduction of legislation that would reduce barriers and incentivize
organizations to share threat indicators with government, and each
other, while also protecting individual privacy. Actuarial data is
extremely thin on the ground and is holding back the growth in market
capacity, particularly to address the previously highlighted risks to
critical infrastructure industries.
As part of the insurance industry's engagement with the Department
of Homeland Security, discussions are ongoing about the possible
formation of a data repository to house anonymized enterprise loss
information. The ability to access anonymized loss data, shared between
industry and government with appropriate privacy protections would also
accelerate the growth of the marketplace, but crucially the ability of
cyber insurance to act as a market incentive for industry to invest in
cybersecurity.
Thank you again for the opportunity to testify, and I will be happy
to answer any questions that you may have.
Senator Moran. Thank you very much, Mr. Beeson. Ms.
Mulligan?
STATEMENT OF CATHERINE MULLIGAN, SENIOR VICE
PRESIDENT, MANAGEMENT SOLUTIONS GROUP,
ZURICH (NORTH AMERICA)
Ms. Mulligan. Good morning, Chairman Moran, Ranking Member
Blumenthal, and members of the Subcommittee. My name is
Catherine Mulligan. I am a Senior Vice President with Zurich
(North America) with our Management Solutions Group.
I lead a market facing team of underwriters who are
responsible for working with our brokers and customers on the
placement of cyber insurance.
I appreciate the opportunity to speak with the Subcommittee
today, and I apologize for my laryngitis as well.
As a brief introduction, Zurich Insurance Group is a global
multi-line insurance provider with a global network of
subsidiaries and offices, 55,000 employees, and customers in
more than 200 countries and territories.
We are the fourth largest commercial property and casualty
insurer in the United States by gross written premium. Mr.
Chairman, as I am sure you are aware, we employ over 400 people
in the state of Kansas.
Zurich has had a cyber insurance product for over 10 years,
and we have invested heavily in the last few years in thought
leadership to address the risk management concerns of our
customers.
In October 2014, Dowling and Partners called ``security &
privacy,'' also known as ``cyber insurance,'' one of the few
growth markets in the U.S. property and casualty industry, and
while sources suggest that the current market is $2 billion in
gross written premium, this number is actually hard to verify
due to the fact that the coverage can be offered blended with
other coverages in addition to stand-alone.
The product was first introduced about 15 years ago and has
its roots in technology errors and omissions, a third party
financial damage coverage, and as privacy regulations evolved,
companies found that they were incurring costs, first party
costs, to respond to privacy events and comply with these
regulations, so cyber policies were developed to respond to
this blend of first and third party costs arising from breaches
and privacy events.
In January of this year, the Insurance Information
Institute reported that market capacity for cyber is on the
rise, and while this optimism is understandable, given the
visibility of these issues, the reality is that the shape of
the marketplace continues to shift.
Number one, capacity is in flux, so in the Dowling &
Partners' report in October, they said that over 60 carriers
wrote the coverage, but that number has since decreased as some
excess markets are pulling out of the product or reevaluating
their appetite, and reinsurers are doing the same.
Pricing is in flux. The insurance industry lacks robust
actuarial data around the loss experience for a product that is
still in its nascency. Unlike general liability policies, which
all commercial enterprises carry, the buyers of this coverage
are largely in a few key industry sectors, such as health care,
and in the large company space, over $1 billion in revenue.
Loss experience is developing. Highly publicized breaches
have led to direct damages in the hundreds of millions of
dollars of costs which continue to rise, and liability costs
have yet to be determined, so what these recent breaches show
us is that there is a severity potential as well as this
unknown element as liability issues are resolved in court.
Coverage and aggregation challenges remain. It is important
to understand the history of the product as financial loss
insurance, as the total scope of exposures presented by a
cybersecurity event currently are beyond the scope of the
current coverage.
For example, a cyber attack may cause physical damage, and
while some limited coverage is available in the marketplace,
current security and privacy forms generally exclude bodily
injury and property damage.
The scope of the exposures is too broad to be solved by the
private sector alone, not all exposures are transferrable to an
insurance policy.
That leads us to the emerging issues of aggregation
tracking and emerging exposures. Multiple lines of insurance
may be impacted by a security event. For example, if a public
company has a significant breach and then has a stock drop as a
result, they may face a shareholder derivative suit, which can
then come in as a claim under their directors' and officers'
liability policy.
That leads us to the public/private sector cooperation. In
2015, the World Economic Forum report stated ``The global risks
transcend borders and spheres of influence and require
stakeholders to work together.''
This echoes Chairman Thune's comments from the February 4
hearing on the NIST Framework, ``Real progress can be made by
continuing to enhance public/private cooperation and improving
cyber threat information sharing.''
Work in this arena, as Mr. Beeson said, includes working
groups at the Departments of Homeland Security and Treasury on
the issue of data repositories, which may need to take a couple
of different forms--sharing of cyber event data, such as attack
vectors, and cyber insurance data, including claims and
underwriting information by sector.
While it is too early to assert any definitive conclusions,
the potential upside of these repositories would be more
comprehensive information could help the insurance industry
develop broader coverage and broader risk management solutions
for our customers.
Thank you.
[The prepared statement of Ms. Mulligan follows:]
Prepared Statement of Catherine Mulligan, Senior Vice President,
Management Solutions Group, Zurich (North America)
Good morning Chairman Moran, Ranking Member Blumenthal and members
of the Subcommittee. My name is Catherine Mulligan and I am Senior Vice
President of the Management Solutions Group for Zurich (North America).
I lead the market facing team of underwriters responsible for working
with brokers and customers on the placement of ``cyber'' insurance. I
appreciate the opportunity to speak to the Subcommittee on the state of
the cyber insurance marketplace and to share thoughts on some of the
challenges we are seeing.
As a brief introduction, Zurich Insurance Group (Zurich) is a
leading multi-line insurance provider with a global network of
subsidiaries and offices. Founded in 1872, Zurich is headquartered in
Zurich, Switzerland with approximately 55,000 employees serving
customers in more than 200 countries and territories.
While Zurich is named after the Swiss city where it was founded, we
are quite proud of our U.S. roots and our global platform for
diversifying risk. In 1912, Zurich entered the U.S. as the first non-
domestic insurance company and quickly became a leading commercial
property and casualty insurance carrier.
Over the last 103 years, Zurich has grown and its U.S. companies
now employ more than 8,500 people in offices throughout the country
with major centers of employment in the metropolitan areas of Chicago,
New York City, Kansas City, Atlanta, Dallas, and Baltimore. Mr.
Chairman, as I am sure you are aware, we employ nearly 400 people
throughout the state of Kansas and write coverage in every single
state. Zurich's U.S. insurance group accounts for roughly 40 percent of
its total global business.
As a result, Zurich is the fourth largest commercial property and
casualty insurer in the United States by gross written premium. It is
the fourth largest writer of commercial general liability insurance,
which includes coverages that, among a wide array of other risks,
protect U.S. manufacturers, importers and retailers against product
liability losses. In addition to this capacity, Zurich also protects
many U.S. construction projects throughout the country as the third
largest fidelity and surety insurer. Zurich protects hundreds of
thousands of U.S. employees and their employers as the fifth largest
workers compensation insurer.
With this context as to who Zurich serves, it was two years ago
when Zurich's senior leadership decided to act to address the risk
management questions and concerns raised by many of our cyber
customers. This began a global thought leadership initiative with the
Atlantic Council and resulted in a white paper report titled: Beyond
Data Breaches: Global Interconnectedness of Cyber Risk. This report was
released in April 2014, and Zurich has shared its findings and
recommendations with its stakeholder community to generate dialog and
steps forward to address the cyber threats.
As cyber attacks occur in ever changing forms on business and
industry that compromise increasing amounts of sensitive information,
this hearing is extremely timely to level set what cyber insurance is,
what it is not, and most importantly some of the challenges marketplace
actors are seeing.
I will dive into specifics later in my testimony, but overall here
is how I see the market. Unsurprisingly given recent high profile
breaches, so-called cyber insurance is quickly becoming a need for
commercial customers. However, as a new market it faces a number of
challenges. Some are somewhat more straightfoward, such as capacity and
pricing, which are in flux as the industry grows and learns of new
challenges.
Yet, others reflect the complexity of the challenge. The term cyber
insurance is a misnomer. A network security and privacy event--the more
accurate term of cyber insurance--can also be caused by something
simple such as improper disposal of paper records. At the same time,
one cyber event can trigger multiple types of claims, for multiple
insureds within one company, and even cause physical damage to a
manufacturer or utility.
The lesson can be boiled down to the simple fact that the scope of
the challenge is too broad to be solved by the private sector alone.
Not all losses from a cyber attack will be or even could be covered by
an insurance policy. This market is new and evolving daily which will
require time to fully mature.
Market overview
In October 2014, Dowling and Partners called security & privacy
(also known as ``cyber'') insurance ``one of the few growth markets in
the U.S. Property and Casualty Industry'' with growth potential up to
$10B Gross Written Premium.\1\ Sources, including Dowling and Guy
Carpenter,\2\ suggest the current market is $2 billion with five or six
carriers offering primary coverage. Guy Carpenter also states that the
six largest carriers have 70 percent of the market share, a statistic
that remained relevant throughout 2014. These premium numbers are
difficult to verify. The coverage can be offered on a stand-alone basis
or blended with other coverages, such as Errors & Omissions.
---------------------------------------------------------------------------
\1\ ``Cyber Security: with CEO Jobs Now on the Line, It's No Longer
Just an `IT' Issue.'' Dowling & Partners IBNR Weekly #39, October 20,
2014
\2\ Guy Carpenter's State of the Tech/Cyber market report (2012)
and Management Liability--Market Overview report (Oct. 2013)
---------------------------------------------------------------------------
Coverage overview and history
The product was first introduced about 15 years ago and has its
roots in technology errors & omissions coverage. This is a third party
liability coverage designed to respond to financial damages resulting
from negligent acts, errors, and omissions in the deliverance of a
product or service. As our world and economy became more networked,
privacy issues came to the fore, which led to the development of
privacy regulations. Companies found they incurred first-party costs to
respond to privacy events and to comply with these regulations. Network
Security & Privacy Liability policies were developed to respond to this
blend of first and third-party costs.
The product in its current iteration has been in the marketplace
since around 2009. There is no industry standard policy language, but
the core elements of the coverage are as follows:
The third-party liability costs arising from network
breaches and privacy events as well as some media liability
events;
The first-party or direct costs a company incurs in
responding to a breach. These include forensics analysis, legal
guidance in compliant breach response, credit and identity
monitoring costs, and the costs associated with a call center
and public relations.
First-party coverages have further expanded to include Business
Interruption and Extra Expense. This is a familiar coverage on most
commercial property policies, but here, instead of responding in the
event of physical loss or damage, this optional coverage can apply to
direct damages arising from downtime caused by a network security
breach.
Marketplace shifts
In January of this year, the Insurance Information Institute
reported that market capacity for cyber insurance is on the rise.\3\
While this optimism is understandable given the visibility of the
issues and the attention significant breaches have garnered from Boards
of Directors and C-Suite executives \4\, the reality is that the shape
of the insurance marketplace continues to shift:
---------------------------------------------------------------------------
\3\ ``Insurance Industry Leaders Believe Market Capacity For Cyber
Insurance On The Rise, U.S. Economic Growth On the Upswing, I.I.I.
Survey Finds.'' Insurance Information Institute, January 14, 2015
\4\ ``Cyber Security: with CEO Jobs Now on the Line, It's No Longer
Just an `IT' Issue.'' Dowling & Partners IBNR Weekly #39, October 20,
2014
---------------------------------------------------------------------------
Capacity is in flux.
Dowling & Partners stated more than 60 carriers wrote the coverage
as of October 2014. Subsequently, our broker partners tell us a
number of excess markets pulled out of the product line or
limited their appetite. Business Insurance has reported on
major insurers restricting their appetites for challenging
industry segments. The London market was tapped out for
retailers by December; although capacity refreshed in 2015, the
pressure was on to find strong support for growing programs.
Reinsurers are also paying careful attention to their
aggregations, and some have amended their appetites for
supporting the coverage.
Pricing is in flux.
The insurance industry lacks robust actuarial data around the loss
experience for a product that is still in its nascency. Unlike
general liability policies, which all commercial enterprises
carry, the buyers of this coverage are largely in a few key
industry sectors (such as health care, financial institutions,
technology, and retail) and in the larger company space (ie.
companies with annual revenues over $1 billion). As loss
experience emerges, and underwriters identify new attack
vectors, pricing becomes more refined. Some segments, notably
retail \5\, are experiencing significant increases in premiums
as high profile breaches in the past 12 months have generated
substantial first party loss dollars, which continue to rise.
---------------------------------------------------------------------------
\5\ ``Data breaches prompt insurers to boost cost of retailers'
cyber coverage,'' Business Insurance, Sept. 28, 2014
---------------------------------------------------------------------------
Loss experience is developing
One major retailer, who suffered a highly publicized breach in late
2013, is reported to have incurred over $250 million in first-
party costs in responding to the attack. Those costs reportedly
continue to rise, and the liability costs associated with the
breach--including liability to consumers and financial
institutions--has yet to be determined. This example
demonstrates the severity potential as well as the element of
the unknown as the liability issues play out in court.
Moreover, we see attack vectors shifting, for example,
approximately 30 percent of breaches originate with a business
partner or vendor, presenting challenges to underwriting the
exposures and controls and to responding to breaches.
Coverage and aggregation challenges remain
It is important to understand the history of this product. The
total scope of exposures presented by a cyber security event is
beyond the current scope of coverage. Richard Clarke's acronym
\6\ for causes of cyber security events remains applicable. He
described them as C.H.E.W.: Crime, Hactivism, Espionage, and
War.
---------------------------------------------------------------------------
\6\ Richard Clarke, ``Cyber War: The Next Threat to National
Security & What to Do About it'', published 2012
While most security & privacy policies do not focus on attribution,
the trigger of coverage must still be a network security breach
or privacy event. We eschew the term ``cyber'' for three
---------------------------------------------------------------------------
reasons:
1. It is not a defined term in most policies;
2. Privacy events may be triggered by an analog event such as
improper disposal of paper records containing personally
identifiable information;
3. A broad term such as ``cyber'' erroneously may suggest that the
coverage could respond to every type of damage caused by an
attack on a network.
We understand that customers have a range of exposures that exist
beyond the financial loss coverage that is provided under a
Security & Privacy policy.
Top areas of concern include Bodily Injury and Property
Damage:
A cyber attack may cause physical damage to a manufacturer or
utility. For example, a December 2014 malware attack to a
German iron plant caused fire damage when a furnace's controls
were compromised.\7\ In 2014, Insurance Service Offices (ISO)
issued exclusions on their general liability forms to clarify
that cyber events are not meant to be covered on the general
liability policy. While some limited coverage is available in
the marketplace, current security and privacy forms generally
exclude bodily injury/property damage.
---------------------------------------------------------------------------
\7\ ``Cyberattack on German Iron Plan Causes `Widespread Damage':
Report,'' The Wall Street Journal, December 18, 2014
The scope of the exposures is too broad to be solved by the private
sector. Not all causes of loss can be transferred to an insurance
policy.
Emerging issues
Aggregation tracking and emerging exposures
Multiple lines of business may be impacted as the result of a cyber
security event. For example, a significant breach to a public company
might result in a stock drop, which leads to a derivative suit that
comes in as a claim under a Directors & Officers Liability Coverage.
Also, one event might impact multiple insureds. For example, a
recent breach at a large health insurer has resulted in claims under
policies for a variety of companies who have business relationships
with that insurer.
The current coverage structure and pricing will continue to evolve
as carriers gain a more comprehensive understanding of the full scope
of the potential. The insurance industry is working with the public
sector to shape policies around these issues.
Public sector
The 2015 World Economic Forum report states that ``global risks
transcend borders and spheres of influence and require stakeholders to
work together.'' \8\ The focus of the report on ``risk interconnections
and the potentially cascading effects they create'' echoes the theme of
the Atlantic Council's 2014 study on cyber risk.\9\ The WEF report
echoes Chairman Thune's comments from the February 4th hearing on the
NIST framework: ``Real progress can be made by continuing to enhance
public-private cooperation and improving cyber-threat information
sharing.''
---------------------------------------------------------------------------
\8\ ``Global Risks 2015--10th Edition'', World Economic Forum,
January 2015
\9\ ``Risk Nexus. Beyond data breaches: global interconnections of
cyber risk'', Atlantic Council, April 2014
---------------------------------------------------------------------------
Work in this arena includes working groups at the Department of
Homeland Security and the Department of Treasury on the issue of data
repositories. Data sharing may need to take a few different forms:
sharing of cyber event data, such as attack vectors and scope, and
cyber insurance data, such as claim and underwriting information by
sector. While it is too early to assert any definitive conclusions, the
potential upside of these discussions is that more comprehensive
information will assist insurers in developing both coverage and risk
management solutions and best practices for our customers.
Senator Moran. Thank you very much. Ms. Sage?
STATEMENT OF OLA SAGE, FOUNDER AND CEO,
e-MANAGEMENT
Ms. Sage. Good morning, Chairman Moran, Ranking Member
Blumenthal, and to the other members of the Subcommittee. It is
an honor for me to be here today, and thank you for the
opportunity to testify on behalf of my company, e-Management,
as a small business consumer of cybersecurity insurance
products.
My company's journey into the cybersecurity insurance
market began in 2013. Small businesses had become the fastest
growing segment for cyber attacks, and I was advising other
small businesses to obtain appropriate business and legal
protections, such as cybersecurity insurance.
However, my company, a 15-year-old IT services and
cybersecurity firm, was not covered. I decided that needed to
change. Working through our insurance broker, we began
researching cybersecurity insurance products but could not find
products designed specifically for small businesses.
We submitted applications to several large insurance
companies, and these applications varied in length and
substance with very little consistency in the questions asked.
Comparing the policies against one another was virtually
impossible, as the language used in one policy was quite
different from the next, and it was unclear whether or not they
covered the same conditions.
Regrettably, I cannot tell you that our selection of a
cybersecurity insurance product was based on a simple and easy
analysis of options, and I also cannot say with confidence that
we picked the best policy for us.
Our process took 4 months and our policy cost over $10,000.
This was a significant investment for a company our size.
We recently passed our one year anniversary, and this time
around, the process started with a letter from the insurance
company informing us that our coverage would not automatically
renew. The abbreviated three page application included one
cyber-related question that asked about changes regarding the
security and protection of our facility and network.
Three weeks later, our policy was renewed. That was the
good news. The surprising news was that our premium increased
by 12 percent. Stunned, confused, and frustrated are just a few
words that described our reaction.
Our broker explained that there were a variety of factors
that went into the underwriting process, and in our case,
ironically, because our revenues grew in 2014 over 2013, that
appeared to be the primary contributor to our increase.
After a year of using the voluntary NIST Cybersecurity
Framework and investing in processes and tools to improve our
overall cybersecurity readiness, it was discouraging to be in
essence rewarded with an increase in our premium.
My experience though is not unique. As I speak to small
business CEOs across the country, many elements of our story
resonates.
In addition, there is a general lack of awareness in four
areas. One, the need for cybersecurity insurance for small
businesses. Two, the availability of insurance products on the
market. Three, what the various policies cover, and last, what
these insurance products cost.
I would like to offer three recommendations that I believe
would encourage more small businesses to take greater advantage
of cybersecurity insurance products.
First, increase the awareness of cybersecurity insurance as
a risk transfer option for small businesses. According to a
recent industry survey, only a third of small and mid-sized
businesses are even aware that cybersecurity insurance exists,
and of that number, only 2 percent actually hold cybersecurity
insurance.
With the average annual cost of cyber attacks to small
businesses reported to be close to $200,000 and the median cost
of down time reported at $12,500, the majority of small
businesses just cannot sustain these costs, leading many to
close their doors.
Cybersecurity insurance can be an important tool to help
small businesses manage significant financial exposure.
Second, make cybersecurity insurance affordable for small
businesses. Cybersecurity insurance needs to provide meaningful
coverage that small businesses can actually afford. We believe
offering competitive cybersecurity products designed for the
small business market will ultimately lead to better deals for
small businesses.
We recommend that insurance companies consider a company's
use or application of the voluntary NIST Cybersecurity
Framework as a best practice factor in their underwriting
processes.
Third, reward small businesses who are actively managing
their cybersecurity risks and implementing reasonable security
measures. Based on our own experience, we strongly believe that
any small business that uses the NIST Cybersecurity Framework
can significantly reduce their cybersecurity risk exposure and
should be preferred candidates for lower premiums.
In closing, I welcome and appreciate the emphasis that
Congress, Federal, state, local agencies, and private sector
organizations have placed on small business cybersecurity
protection. As the threat and challenge to small businesses
continues to persist, we at e-Management are committed to
continuing to work with all parties to identify and develop
simple and affordable solutions.
Thank you again for the opportunity to testify, and I am
ready to answer any questions you may have.
[The prepared statement of Ms. Sage follows:]
Prepared Statement of Ola Sage, Founder and CEO, e-Management
Opening Remarks
Good morning Chairman Moran, Ranking Member Blumenthal, and
distinguished members of the Committee. It is an honor for me to be
here today.
My name is Ola Sage and I am the Founder and CEO of e-Management, a
small business provider of high-end IT services and cybersecurity
solutions to clients in the private and public sectors, including the
largest U.S. Federal agencies. Founded in 1999 and headquartered in
Silver Spring, Maryland, we employ close to 60 IT professionals who
deliver services in our core areas of IT Planning, Engineering,
Application Development, and Cybersecurity. In 2013 we were honored to
receive the Department of Energy's Cybersecurity Innovative Technical
Achievement award, highlighting the expertise of our cybersecurity
experts in designing and implementing advanced cybersecurity detection
and risk management capabilities. Our newest cybersecurity risk
intelligence software solution, CyberRx, automates the National
Institutes of Standards and Technology (NIST) Cybersecurity Framework
(CSF) and is designed to help small businesses easily measure their
cybersecurity capabilities, manage their cybersecurity risks, and
communicate their cybersecurity readiness to internal and external
stakeholders.
I am a champion and advocate for Small and Medium-Sized business
(SMB) cybersecurity readiness. I currently serve as an elected member
on the Executive Committee of the National IT Sector Coordinating
Council (IT SCC). The IT SCC, comprised of the Nation's top IT
companies, professional services firms, and trade associations, works
in partnership with the Department of Homeland Security (DHS) to
address strategies for mitigating cybersecurity threats and risks to
our Nation's critical infrastructure, especially for organizations and
businesses that are particularly vulnerable such as SMBs. I am also an
8-year member of Vistage, an international organization of 19,000 CEOs
that control businesses with annual sales ranging from $1 million to
over $1 billion. I regularly meet with and speak to small business CEOs
in Vistage, and other small business forums about why cybersecurity
should matter to them and how it can affect their ability to keep
business, stay in business, or get new business. In the last 3 months
alone, I have spoken to more than 100 SMB CEOs that represent a diverse
mix of industries.
Thank you for the opportunity to testify today on behalf of e-
Management as a small business consumer of cybersecurity insurance
products. In my testimony today, I will discuss:
My company's involvement with cybersecurity insurance
including our application and renewal process
Perspectives that I have as a CEO and from other CEO's
relative to cybersecurity insurance
Opportunities for the cybersecurity risk insurance industry
Concluding thoughts
Our Driver
My company's foray into the cybersecurity insurance market began in
November 2013 as I prepared for a webinar on cybersecurity titled
``We've Tipped: 5 Ways to Increase Your Cybersecurity Resiliency.'' The
webinar discussed the wave of cyber-attacks that were occurring across
all industries, highlighting the significant increase in attacks on
small businesses and the impacts--including financial, legal, and
reputational--that they were having on all sizes of business, including
the disproportionate and negative impact to small business. According
to the Cyber Security Alliance, 60 percent of small businesses go out
of business within 6 months of a significant cybersecurity event.
Among the five key recommendations I made in the webinar was for
businesses to make sure they had appropriate business and legal
protections (e.g., business policies, insurance, etc.). I thought about
my own company and whether we had taken appropriate steps to include
business and legal protections in the area of cybersecurity. As a
company, we had participated for more than a year with NIST as they
worked with thousands of security professionals in government and
private industry to develop the CSF. Upon release of the Preliminary
Draft of the CSF, NIST encouraged companies and organizations to try it
and provide feedback that could inform the final version (v 1.0 which
was ultimately published in February 2014). We took the challenge.
Methodology
In our ``test drive'' of the CSF, we used the Framework as a way of
assessing our cybersecurity readiness in the five core cybersecurity
functions (Identify, Protect, Detect, Respond, and Recover) and mapped
the results to the four Implementation Tiers to help us to understand
how our current cybersecurity risk-management capabilities measured up
against the characteristics described by the Framework and to assess
the degree of risk management rigor we were applying to each of the
five core functions. Overall, the CSF provided a common language that I
could use with my management and IT teams in organizing our thinking
around cybersecurity. We were able to distill where we needed to
prioritize our efforts and focus our dollars. We found it to be a very
effective and useful tool.
Our Cybersecurity Insurance Experience
In addition to technical and operational changes we made after our
initial CSF readiness assessment, we decided to move forward with
researching what cybersecurity insurance products were available on the
market, specifically available offerings for SMBs. As I'm sure it will
come as no surprise to anyone here, we could not find cybersecurity
insurance products designed specifically for SMBs. The cybersecurity
insurance industry was and is still in a nascent stage.
Working through our insurance broker, we submitted applications to
several large insurance companies. The applications varied in length
and substance, with very little consistency in the questions asked.
When the quotes arrived, they ranged from a couple thousand dollars
from one insurer to twelve thousand plus for another. Comparing the
policies against one other was virtually impossible as the language
used in one policy was quite different from the next and it was unclear
whether or not they covered the same conditions. As expected, all of
the policies contained exclusion clauses, however it was not clear from
policy to policy whether the exclusions were similar or not.
Regrettably I cannot tell you that our selection of a cybersecurity
insurance product was based on a simple and easy analysis of options.
We ended up with a policy that combines cybersecurity liability and
errors and omissions, but honestly, as I sit here today, I cannot say
with confidence we have the right policy for us. All told, the process
from start to finish took four months and cost over ten thousand
dollars. This was a significant investment for a company our size.
We continue to regularly monitor and manage our cybersecurity
risks, and implement preventative measures based on the results of our
Framework assessment. We call it ``operationalizing'' the CSF. We
understand it is not possible to achieve 100 percent cybersecurity, but
as a provider of IT and cybersecurity services, we believe it is
important to convey to our employees, customers, and vendors that we
take cybersecurity seriously and understand the potential damage it
could cause to them. In addition to doing it for the right reason, we
also see it as a competitive advantage.
We have taken it a step further. Understanding the value the CSF
gave us, we wanted to share our experience with other small businesses.
Drawing on our entrepreneurial instincts, we created and brought to
market a software solution that automates the CSF in a way that is
simple and affordable for other small businesses to use. In two hours
or less, a small business can conduct a ``fitness'' review of their
cybersecurity readiness in the CSF's five core areas. In addition, the
small business CEO receives information unique to their company that
provides them insight into their level of technical, operational, and
financial exposure. It is actionable risk intelligence. We call it
CyberRx. CyberRx makes it easy for a small business to understand how
prepared their business is to identify, protect, detect, respond, and
recover from cybersecurity attacks and alerts them to areas that need
attention. They quickly know what areas to focus on and what their next
steps should be. We use CyberRx in our company today to continuously
manage our own cybersecurity risks.
Renewing our Cybersecurity Insurance
This brings me back to our cybersecurity insurance experience. We
have just passed our one year anniversary and this time around the
process started with a letter from the insurance company informing us
that our coverage wouldn't automatically renew. We received an
abbreviated application (3 pages vs 15) which we completed and sent
back. There was only one question around cybersecurity asking whether
there had been any changes regarding the security and protection of our
facility and network. The instructions indicated that if the response
was ``Yes'', we needed to indicate if we had experienced a security
breach? As we thankfully did not experience a breach (that we know of)
we were able to answer no. We received our renewed policy in
approximately three weeks, which was the good news. The surprising news
was that our premium increased by 12 percent.
Stunned, surprised, frustrated, confused, discouraged, etc. are all
words that would accurately describe our reaction. After a year of
investing in processes and tools to strengthen our cybersecurity
posture, the result was an increase in premiums. Doing the right thing
didn't seem to pay, literally. We went back to our broker to better
understand how this could have happened and were informed that there
were a variety of factors that went into the underwriting process. In
our case, ironically, because our revenues grew in 2014 vs 2013, that
appeared to be the primary contributor to the increase. When we asked
whether or not using the CSF could be a factor, our broker wrote that
``although they do not specifically inquire as to whether or not an
insured is following the voluntary cyber security framework provided by
NIST, they obviously take into consideration any preventative measures
an insured implements when underwriting a risk.''
SMB CEO Perspectives
My experience is not unique. As I speak to small business CEOs
across the country, there is a general lack of awareness about (1) the
need for cybersecurity insurance; (2) what cybersecurity insurance
products exist on the market; (3) what the various polices cover; and
(4) what the costs are.
1. The need for cybersecurity insurance
Many SMB CEOs just don't believe they have anything cyber hackers
would want. ``We're too small,'' some will say, believing that
hackers are only interested in the large companies where they
can get more ``bang for their buck.'' Interestingly, another
subset of SMB CEOs believe that cybersecurity insurance is
already included in their professional liability coverage, and
therefore do not see the need for additional or separate
coverage.
2. Availability of cybersecurity insurance products
Of the 100 or so SMB CEOs I have spoken to over the past three
months, easily 70 percent were not aware of what cybersecurity
insurance products are available on the market. Once informed
they were curious to learn more. This aligns with a recent 2015
survey by Gartner company, Software Advice, who reported that
after defining cyber insurance to the SMB decision-makers in
their survey, they found that a combined 52 percent were either
``very'' or ``moderately'' intrigued, with another 32 percent
``minimally'' intrigued, giving an overall 84 percent who
expressed some level of curiosity.\1\
---------------------------------------------------------------------------
\1\ http://www.softwareadvice.com/security/industryview/cyber-
insurance-report-2015/
---------------------------------------------------------------------------
3. Policy Coverage
Understanding what the different cybersecurity insurance policies
cover can be a challenge, not just for SMBs, but also for many
brokers. There does not appear to be any common terminology or
contract organization amongst carriers, thus making it
difficult and costly to truly understand what an individual
policy covers and to compare competing insurance products.
4. Cost of Coverage
The cost of cybersecurity insurance varies widely. Our own
experience with a range of quotes from $2,000-$13,000 is not
uncommon. This large variance can discourage SMB CEOs from
making needed investments in cybersecurity insurance. In
addition, for many SMBs, such rates are cost prohibitive for
what they might consider ``elective'' insurance. Given the
challenges with understanding and comparing the scope and
coverage of various insurance products on the market, SMBs may
incur additional costs in connection with the placement or
renewal of insurance in addition to the cost of the insurance
itself.
Opportunities for the Cybersecurity Risk Insurance Industry to Assist
SMBs
There is no 100 percent level of cybersecurity. At e-Management, we
strongly believe cybersecurity readiness is about risk management. We
offer the following straightforward recommendations that we believe
would encourage SMBs to take greater advantage of cybersecurity
insurance products.
1. Increase awareness of cybersecurity insurance as a risk transfer
option for small businesses.
Cybersecurity insurance can be an effective tool to help small
businesses manage their financial risk and should be a key part
of a company's cyber and information security practice. Several
years ago, Symantec reported that the average annual cost of
cyberattacks to small businesses was $188,242 with median cost
of downtime for an SMB reported at $12,500 per day. These costs
can be devastating, in many cases leading small businesses to
shut their doors. However, a majority of small businesses are
not aware of cybersecurity insurance. According to the 2015
survey by Software Advice, only a third of small and midsize
businesses are even aware that cybersecurity insurance exists
and of that number only 2 percent actually hold cybersecurity
insurance. I understand that in the last year there have been
extensive discussions among government, private companies,
insurance groups, and other relevant stakeholders about
expanding the role of cybersecurity insurance in public and
private industry business agreements. While I think this is a
necessary and important conversation to have, I encourage these
discussions to continue to be as thorough and transparent as
possible including a full review of potential impacts or
consequences that particular policy decisions could have,
particularly to SMBs.
2. Make cybersecurity insurance affordable for SMBs
Cybersecurity insurance needs to provide meaningful coverage that
SMBs can actually afford. Various industry reports indicate
that SMBs continue to be the fastest growing segment of
cyberattack victims, creating a huge vulnerability, not just
for the SMBs, but for their customers, vendors, and suppliers.
We believe offering competitive cybersecurity insurance
products designed for the SMB market can lead to better deals
for SMBS. We recommend that insurance companies consider a
rating system based on the CSF that underwriters could consider
as a factor in the underwriting process. SMBs that demonstrate
use of the CSF could receive a higher rating as they have
mitigations in place which line up with industry standards and
best practices.
3. Reward SMBs who are actively managing their cybersecurity risks
and implementing reasonable security measures.
In 2014, the Online Trust Alliance indicated in a report that 90
percent of the year's breaches could have been prevented if
organizations implemented basic cybersecurity best
practices.\2\ The CSF is a model cybersecurity best practice
and offers a defensible way to assess and manage cybersecurity
risks. Based on our own experience, we strongly believe that
any small business that uses the CSF can significantly reduce
their cybersecurity risk exposure. Small businesses that are
actively managing their cybersecurity risks should be preferred
candidates for lower premiums and tax incentives.
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\2\ https://www.otalliance.org/news-events/press-releases/ota-
determines-over-90-data-breaches-2014-could-have-been-prevented
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Conclusion
At e-Management, we continue to find the CSF to be a useful tool in
helping us and other SMBs organize the way we think about cybersecurity
risks and the best practices we need to implement to reduce our overall
cybersecurity risk exposure. We appreciate the emphasis that Congress,
NIST and the DHS have placed on educating SMBs about the increasing
cybersecurity threat and raising awareness of the CSF. We welcome
continued efforts in this area and encourage the addition of
cybersecurity insurance in the discussion as another tool that SMBs can
consider along with other risk management solutions.
While simply obtaining cybersecurity insurance cannot be viewed as
a silver bullet, I believe cybersecurity insurance can be an important
tool in helping SMBs manage significant financial exposure associated
with a successful cyber attack. As the cybersecurity threat and
challenge to small business continues to persist, we at e-Management
are committed to working with government and industry to identify and
develop simple and affordable solutions that enable small businesses to
strengthen their cybersecurity readiness and posture.
Thank you again for the opportunity to testify, and I am ready to
answer any questions you may have.
Senator Moran. Thank you very much. Mr. Menapace?
STATEMENT OF MICHAEL MENAPACE, COUNSEL, WIGGIN AND DANA LLP,
AND ADJUNCT PROFESSOR OF INSURANCE LAW, QUINNIPIAC UNIVERSITY
SCHOOL OF LAW
Mr. Menapace. Good morning, Senator Moran, Senator
Blumenthal. Thank you for inviting me to today's hearing.
I have submitted written testimony, but I appreciate the
opportunity to highlight a few of the issues that I discussed
in that testimony, including the evolution of cyber insurance
and its cost drivers, breach notification requirements, data
breach information sharing, and data protection standards.
As you have heard, in the early 2000s, a small group of
insurers did start offering cyber insurance. Those early
insurers have now acquired somewhat significant experience and
are sophisticated participants in this specialized market, but
the market also has smaller insurers who are less experienced
and do not necessarily have the same level of expertise as the
market leaders, and have less mature books of business.
When cyber insurance was first conceived, we originally
thought the cost driver would be third-party litigation against
insureds as well as first-party property losses. While
litigation is still an important consideration, there was not
an appreciation at that time of what would become the cost
drivers.
According to several industry sources, data breach response
costs, sometimes referred to as ``crisis response costs,'' now
account for up to 50 percent of the cost of data breaches.
These response costs include technology forensics services,
legal guidance, consumer notification, credit monitoring, call
centers, public relations.
With regard to the legal guidance and consumer
notification, there is an available strategy to lower the
costs. Currently, there are 47 states with separate breach
notification laws, some of which are inconsistent with each
other.
As a result, when a breach occurs, businesses and insurance
companies engage lawyers like me to perform 47 legal analyses
based on the facts at hand. As you can imagine, 47 separate
legal analyses can get expensive. Moreover, the diversity of
the 47 states means that a consumer in one state may be
notified while a consumer impacted by the same breach who lives
in another state may not be notified.
A single Federal standard that preempts the current
patchwork could save time and expense and provide for the
uniform treatment of consumers.
With regard to data sharing, I mentioned that some insurers
have mature books of business, and they rely on their own
proprietary analytics to analyze the data they hold. Other
market participants, however, could benefit by accessing a
nationwide pool of data to help them decide which risks to
underwrite and the appropriate premiums to charge.
A nationwide database of cyber breach information,
particularly with regard to the origins and causes of the
breaches, could also assist non-insurance businesses as they
assess their own processes and protocols and look to spot
trends with the goal of avoiding loss.
I appreciate the competing positions and interest on this
issue, but whether the database is created and maintained by a
public agency, the private market, or a public/private
partnership, I do believe the market as a whole could benefit
from sharing information about data breaches.
Finally, I would like to say a few words about data
protection standards. HIPAA provides one model, it provides the
model of Government mandated data protection standards. Another
model is the development of flexible industry led and voluntary
guidance for specific industries, like we have with the NIST
Framework.
Now, the existing NIST Framework cannot simply be applied
to other industries, but it is an example of what a public/
private partnership can look like. That type of framework can
inform businesses on their own practices, and even though they
are largely subjective in nature and therefore of limited value
to insurance actuaries, the goal and guidance in the Framework
could be incorporated by insurers as part of their underwriting
considerations.
Appropriate data protection practices will likely evolve
over time without government involvement, but government
involvement or encouragement could be an efficient way to help
the standard evolve more quickly across a variety of markets.
I am happy to answer and respond to any questions.
[The prepared statement of Mr. Menapace follows:]
Prepared Statement of Michael Menapace, Counsel, Wiggin and Dana LLP;
Adjunct Professor of Law, Quinnipiac School of Law
Sen. Jerry Moran, Sen. Blumenthal, and other members of the
Subcommittee--
I am pleased to provide testimony today concerning this Committee's
interest in the growing cybersecurity insurance market, the evolution
of the insurance coverage, opportunities to strengthen the insurance
industry, and the insurance market's impact on cybersecurity.
I would be pleased to respond to specific questions posed by the
Committee and I would like to cover in my testimony several specific
issues concerning the evolving cyber insurance marketplace.
Specifically, I would like to discuss the cost-drivers for cyber
insurance, the role that the insurance industry and the government can
play in helping in the development and evolution of standards for
breach notification, the sharing of data breach information, and
flexible, industry-specific standards for protecting consumer data.
The testimony I provide is my own and not necessarily that of any
of my firm's clients.
Background and Introduction
I practice law at the law firm of Wiggin and Dana after having
previously practiced at a large international law firm. In addition,
for the past 6 years, I have taught Insurance Law at the Quinnipiac
University School of Law and have published articles and books on a
variety of property and casualty insurance issues. In my law practice,
I, along with my colleagues, represent companies in a broad spectrum of
industries by helping them develop data security and privacy protocols
and procedures, and I represent insurance companies in several areas,
including cybersecurity. In both my academic role and in private
practice, I have the opportunity to work closely with businesses in
many market segments, insurance companies, and regulators.
Examining the intersection of insurance and cybersecurity is an
important and timely topic for this Committee. Insurance often evolves
slowly, but we are in the midst of a period in which technological
advancements and the development of a relatively new product are
occurring simultaneously. No doubt, we are living through a dynamic
period in the insurance industry and we should not underestimate the
importance of the insurance industry in terms of risk transfer and the
information insurers provide to insureds on loss mitigation strategies
and loss trends.
The insurance industry is in a unique position to help regulators,
businesses, and consumers assess and respond to the ever-growing threat
of data breaches. Insurers can help businesses and consumers respond
quickly and efficiently when breaches unfortunately, but inevitably,
occur. Insurers have first-hand experience with large amounts of
consumer data. Moreover, insurers are in the business of examining and
responding to risks, tracking emerging trends, and finding ways to
mitigate their impact. Indeed, insurers often provide information and
best practices to their insureds to help avoid losses.
By definition, insurers deal with events that are uncertain from
the viewpoint of the insured. There is an element of fortuity at the
heart of insurance that insureds cannot predict. While this element of
uncertainty is present to insureds, insurers can pool large amount of
data and experience to see trends as they evolve--this helps them price
insurance policies appropriately and remain in a financial position to
pay claims.
In addition to the traditional goal of providing risk transfer,
insurers can help insureds avoid loss in the first instance. For
example, insurers have traditionally helped in the development of
safety programs to help employers and employees avoid workplace
injuries. Obviously, such programs help workers, but they also assist
the purchasers of insurance by bringing down premiums. In all, the goal
of the insurer is for their insureds to avoid losses and to make those
losses that inevitably occur smaller and easier to rectify.
The insurance market can play a similar role in cybersecurity with
risk transfer products and sharing information and experience with
their insureds.
Evolution of Cyber Coverage
There are some insurers, particularly the large insurers, who have
been writing some form of cyber coverage for well over a decade. They
have become quite sophisticated and efficient in providing excellent
risk transfer products to a variety of markets. However, there are
approximately 40 insurers in the U.S. that are currently providing
cyber coverage, and among those insurers are some that are relatively
small by comparison to the market leaders and who are less experienced
and sophisticated in providing cyber insurance. While the insurance
market as a whole could benefit from the topics we are discussing
today, it is the smaller companies and those with a less mature book of
business that would likely benefit the most--and, by extension, their
insureds would see benefits in the form of lower premiums and thriving
insurance marketplace.
I will discuss breach notification standards, the sharing of data,
and the development of data protection standards in a few moments, but
I would first like to discuss how the cyber insurance market has
evolved to where we find it today.
During the ``dot com'' boom of the early 2000s, some insurers
started offering insurance products for technology companies.
Originally, those insurers provided first party property loss coverage
along with some third party liability coverage. The first party
property loss coverage was designed to cover, for example, losses the
policyholder experienced for damage to its own technology equipment and
infrastructure. The third party liability coverage was designed for
exposure to third party lawsuits against the insureds.
The early coverage was written that way because, in those nascent
years, the insurance market believed that the liability losses would be
driven by the cost of defending lawsuits and paying settlements or
judgments as a result of those lawsuits. But the predictions on the
cost-drivers were not entirely accurate and today's products have
developed to reflect this reality.
While third party lawsuits are still one factor insurers consider
how they draft policy wordings and price the coverage they offer, we
have seen that data breach response costs have come to the forefront in
the minds of insurers and insureds alike.
Neither insurers nor insureds anticipated that these breach
response costs, sometimes called crisis service costs, would be the
significant cost drivers that they have become. These breach response
expenses have become costs drivers for several reasons, including the
fact that many data breach lawsuits are dismissed in the early phases
of litigation. These lawsuits are often dismissed because the
plaintiffs cannot show or even plead concrete damages--in response to
breaches, businesses or their insurers often provide credit monitoring
at no cost to consumers and until actual damage to the consumer can be
alleged as a result of the data breach, the damages are speculative.
Obviously for those cases that are dismissed, there are no settlement
or judgment costs borne by insurers and the defense costs are
extinguished, whereas every breach will have breach responses expenses.
According to a recent insurance industry survey, the initial crisis
service costs account for about half of all data breach costs. Those
breach response services include technical forensic investigations,
attorney oversight, breach notification to and credit monitoring for
affected consumers, call centers, and public relations services. The
other half of the costs go towards legal defense and settlement,
regulatory response and defense, regulatory fines, and fines imposed by
credit and debit card issuers.
A Federal Breach Notification Standard--Reducing the costs of breach
responses and treating consumers equally
As of today, the are 47 states, plus Puerto Rico, Washington D.C.,
and the Virgin Islands, that have requirements for notifying customers
after the unauthorized access of personally identifiable information or
protected health information. Many of these state requirements also
require notification of the state attorney general when a certain
number of residents have been impacted.
But, these state requirements are not uniform in terms of when they
are triggered and what information must be contained in the consumer
notices. Therefore, when responding to a nationwide incident, lawyers
like me must assess the impacted data and consumers under 47 different
sets of requirements. Among the questions we must ask for each state
are:
Has the breach notification standard been triggered?
Must the consumer(s) be notified under the facts of the
incident?
What information must be contained in the notification?
Must we notify state regulators or attorneys general?
Must notice be given in a specific timeframe?
Are we required to provide specific consumer protection
services such as identify theft insurance and/or credit
monitoring?
This 47-state exercise can be a costly endeavor and, frankly, can
result in a situation where some consumers and state officials are
notified in one state while consumers and officials in other states are
not notified about the very same incident. As both industry members and
regulatory authorities have noted, this current patchwork quilt of
state breach notification requirements creates gaps in consumer
protection as well as additional burdens for businesses that experience
cyber-attacks
A nationwide standard for breach notification that preempts state
law requirements would eliminate the time, expense, and inconsistencies
involved in the 47-state analysis for each breach and would provide for
uniform treatment of consumers. I note, however, that any such Federal
standard must carefully consider the time-frame within which business
must notify consumers whose data may have been affected. The time-frame
must balance the needs of timely notice to consumers with the concern
of providing consumers with accurate information. Increasingly, large
breaches involve complex attacks that require equally complex forensic
investigations to determine the actual scope of data losses.
Nationwide Data Clearinghouse--Assisting underwriting and spotting
trends
There are many lines of insurance that have fairly standardized
coverage terms and conditions regardless of which insurer is issuing
the coverage. For example, the vast majority of general liability
policies purchased by businesses are based on standardized policy
language. The Insurance Services Offices, Inc. (ISO), publishes
standard liability policy language for many lines of property and
casualty insurance. Insurers can choose to adopt the ISO forms and, in
the case of general liability policies, most insurers do adopt the ISO
policy or use policy wording that is very similar.
However, there is no standard insurance policy language for cyber
insurance. ISO did recently publish cyber coverage terms, but I know of
no insurer that has adopted the ISO policy terms or has plans to do so
in the near future.
Among the approximately 40 insurers that offer cyber insurance,
there are some with significant experience and who have policy language
that they have developed over the course of more than a decade of
experience. Those insurers are comfortable with their policies even
though they will undoubtedly continue to evolve. Other insurers, some
who are newer entrants into the cyber insurance market and others who
are looking to differentiate themselves from their competitors, have
their own policy language that has not been tested to the same extent
as the policy terms used by the insurers with more mature books of
business.
Understanding these differences in policy language from one insurer
to another can be a challenge to insurance purchasers and brokers, but
the diversity in the market also gives purchases more choice to
purchase insurance tailored to their specific needs.
In and of itself, this diversity of policy terms and conditions is
not problematic for individual insurers. What can be challenging for
some insurers is making sure they have enough data to make prudent
underwriting decisions when they sell policies.
For insurers to have good underwriting in terms of deciding what
risks to insure and how to price the coverage, it is important for them
to have a good data set of past experience and loss information. There
are some insurers who have been active in the cyber insurance space for
a long time, they have developed their own database of loss experience,
have a mature book of business, and have refined their criteria for
underwriting decision. But, for the smaller insurers and for new
entrants into the market, they do not necessary have the same
foundation from which to make underwriting decisions.
A nationwide database or clearinghouse for data breach information,
specifically recording how each breach occurred and who was responsible
for the breach, could be helpful to the insurance market generally and
for businesses that are implementing their own data protection
practices, processes, and protocols. Insurers could use the information
to supplement their existing underwriting criteria. In addition,
businesses in many industries could use the data to learn about the
causes of other breaches and apply that information to improve their
own efforts to keep consumer information safe. All market participants
would be able to use the data, for example, to spot trends in cyber-
attacks and hopefully respond before those attacks are repeated.
I do not intend to imply that insurers are making underwriting
decisions in a cavalier or uninformed manner. But there is no doubt
that not all breach incidents receive national attention in the press
and a nationwide database to which business could report information
and from which they could learn from others could be a positive force
in combating the evolving threat of cyber intrusion and data
misappropriation. The Federal Government could play a role in
encouraging the creation of and participation in such a clearinghouse.
I can envision several ways the database or clearinghouse could be
established and administered, either by private market participants,
the Federal Government, or a public-private partnership. I do not have
a view on the best method to accomplish this, and I concede there is
debate on whether this kind of sharing is prudent, but there is a valid
argument that more information can be a net positive for the market in
general.
Flexible and Industry-Specific Data Protection Guidelines--Assisting
Businesses and Underwriters
As this Committee and the other witnesses here today know, there
are data protection standards that have been imposed on, or adopted by,
certain business segments. For example, HIPAA provides, among other
things, a set of national standards to protect personal health
information and applies to ``covered entities'' and ``business
associates.'' This is an example of government imposed standards. On
the other hand, the NIST Cybersecurity Framework that was published
about a year ago provides a different model from HIPAA. As this
Committee is aware, the NIST Cybersecurity Framework was a
collaborative effort between industry and government and consists of
processes, guidelines, and practices to promote the protection of
critical infrastructure. The prioritized, flexible, repeatable, and
cost-effective approach of the Framework helps owners and operators of
critical infrastructure to manage cybersecurity-related risk. The
Framework is not a fixed, uniform standard, but instead is a
generalized framework for managing cyber-risk based on a continuous
cycle of threat assessment and risk mitigation measures which can be
customer by industry sector and by each organization. While still
evolving, the Framework may over time become a baseline or benchmark of
cybersecurity preparedness in some sectors.
There are other markets and industries that have neither legally-
mandated nor widely-adopted voluntary security standards and guidance.
For example, the mobile apps industry, education institutions and
retailers do not yet have industry-specific guidance on what
protections they should employ to protect the data they collect, use,
and store. As a result of recent `mega' data breaches, such as Target
and Home Depot, we may see more coordinated industry efforts in this
regard.
Industry guidance, even if voluntary, can serve several purposes.
One, it could provide a standard that businesses can use to gauge their
own policies, protocols, and procedures. Two, the insurance market can
look to that industry-specific guidance during the underwriting process
to assess whether to underwrite a specific business and what price is
appropriate for coverage. The NIST Framework contains subjective
criteria--it is not a list of quantifiable metrics. Nevertheless,
businesses can look to such frameworks as they examine their own
business practices and as they consider what to expect when applying
for cyber insurance.
Insurance company actuaries may find the Framework less helpful,
but guidance like the NIST Framework can provide some common
expectations that insurers and insureds alike can use. Three, when
government sponsored guidelines are industry-led, market participants
can have some confidence in the standard that will be applied by a
regulatory body in a post-breach inquiry. And, four, the standards
could be a useful tool as private litigants and courts look to the
appropriate standard of care that a business should be held to.
It seems that the intent of any guidance or standards is to provide
businesses with data protection expectations or best practices. But as
a secondary benefit, insurers could choose to use the guidance as part
of the criteria considered during the underwriting process.
Any data protection guidance or framework, however, consistent with
the approach of the NIST Framework, must be industry specific. For
example, the data protections guidelines applicable to retailers are
different than those applicable to entertainment companies, banks,
education institutions, or health care providers to name just a few
industries with uniquely specific needs.
In addition, the industry standards must remain flexible to
accommodate the size of the company, the data at issue, and technology
as it emerges. Software will change, existing technology will continue
to evolve, and we will see the use of wearable technology, drones, and
the Internet of Things expand in use. Therefore, any government-
sponsored or encouraged security guidance must be able to adapt in real
time and should be technology-neutral and risk-based.
Insurers understand already that business should not be required to
use specific software or hardware. Instead, when deciding whether to
cover a particular business or how much the coverage should cost,
insurers sometimes are more interested generally in the business's
culture towards data protection. If a company is committed to securing
the data it holds, that company will likely update its software, its
procedures, and its processes, making insurers more likely to
underwrite coverage for that business. In examining the data protection
culture of a business, cybersecurity frameworks, like the NIST
Framework, can be useful tools even though, as stated earlier, they
will not provide the actuaries with objective metrics on a particular
insured or industry.
If the government decides not to move forward with security
guidelines for particular industries, such industry-specific standards
and expectations will nevertheless likely develop over time in the
marketplace. But, a partnership between the government and private
industry could accelerate the development and adoption of flexible
guidelines that will, ultimately, benefit consumers without restricting
innovation.
Getting businesses to examine their own practices in the course of
purchasing insurance does have a recent precedent. Several years ago,
when insurers started asking their business customers how they viewed
their susceptibility to climate change impacts and what they were doing
to address those risks, some business began looking at those issues for
the first time and responded accordingly. There was no government
mandate for insurers to ask these questions, but insurers did so
because they saw that climate change risks could impact their customers
and, by extension, themselves. The insurance market could spur the type
of self-examination by businesses with cybersecurity measures and there
does seem to be a role that the government can play to encourage this
outcome. In the end, if insurers are confident that their concerns have
been incorporated into any cyberssecurity guidance that is developed
and they adopt that guidance as part of their underwriting processes,
businesses will be encouraged and incentivized to address those issues
even if security standards are not mandated by the government.
I thank you for the opportunity to provide this testimony and am
available to try to address any specific questions the Committee has
for me on these or related topics.
Senator Moran. Thank you very much. We appreciate the
testimony. I look forward to the dialogue that now will occur
with you.
Let me start with a typical congressional question, which
is about legislation. You, Mr. Menapace, talked about the
standard, the information sharing. Mr. Beeson, you indicated
the industry would be supportive.
As you heard me say and maybe know, this subcommittee had a
hearing a few weeks ago on those topics, what the standard
should be, how it should be enforced.
Let me ask, if you were in our shoes, and this is really a
question to all the witnesses, if you were in the shoes of a
Member of Congress, what is the legislative solution that would
drive the increase in an insurance market, and what I think
would be the consequence of that would be better security
practices and less opportunity for breach.
What public policy should we pursue, what legislation
should be passed by Congress that would enhance the chances for
that scenario to occur?
You do not sound like you are from Kansas City, but we
consider you one of us.
Mr. Beeson. Thank you, Chairman. I think as you heard in my
testimony, there is a real linkage between improved
cybersecurity and potentially the growth of the insurance
market itself. I was arguing that more statistics can help
drive that, more data can help drive that, but equally, if
there was legislation passed that helps industry improve its
security posture, which I believe the proposed legislation to
do with threat indicator information sharing between industry
and Government and between industry.
As we have seen, that has been very effective already in
some of these ISACs, information sharing analysis centers,
within the private sector. Actually, it would help industry
improve its security and thereby help the insurance market sign
onto risks, if you like, that it otherwise would not have done.
That would in and of itself help grow the market.
Senator Moran. Anyone else? Ms. Mulligan?
Ms. Mulligan. Thank you, Mr. Chairman. I would support what
Mr. Menapace said around a national database of information
because the breaches right now are really outpacing the usual
time it would take for an insurance product and pricing to
develop.
That information would help us, as Ms. Sage points out,
differentiate the pricing and the coverage for different sizes
of insurance and industry segments.
Senator Moran. You agree with Mr. Menapace about the
national standard as compared to 40 some states?
Ms. Mulligan. I agree with him actually on both points, the
national standard for notification, because that would
streamline the process and the cost for insureds, but also on a
data repository of sharing information.
Senator Moran. I am actually surprised that there is enough
information in today's current world for you to price an
insurance policy. What is out there that allows you to have
this market to the degree that it exists today?
Mr. Beeson. As you heard from Mr. Menapace, the cyber
insurance market has been around for roughly 15 years, and
really since the first breach notifications in California in
2003, the market has built up data.
Specifically, it is important to delineate this, because
there are different types of assets at risk here. The cyber
insurance market is focused primarily on the risks of handling
personal data, consumer, patient, employee. There is quite a
bit of data around to model, ``data'' being statistics, around
frequency severity, to model the risk in that area.
The problem at the moment is there is a dearth of
information now as the risk has morphed, for example, into the
risk of physical assets. On the utility, maybe I am not so
worried or that is not my primary concern, handling of personal
data. I am more worried about physical damage to the turbine
from a cyber attack, for example. That is very challenging
right now, and frankly, ambiguous as well for the insurance
industry in terms of how to handle that.
Senator Moran. While the industry is growing, it is growing
everywhere, but different from segment to segment, it is
coverage to coverage, the type of risk that you are insuring?
Mr. Beeson. As I say, to some extent, this is a symptom of
the insurance industry, it is fairly siloed and risks are
looked at in different boxes, if you like, with different
specialist underwriters.
Cyber is a challenge, of course, because it sits across
just about everything, and it is only recently, and thanks
really to the Federal Government shining the light on the issue
through the creation of the NIST Framework, that cyber is being
viewed in a much broader perspective.
It is not just about data breaches. It is actually now
also--I think this in many ways should be seen perhaps as a
greater concern to Government. It is a critical infrastructure
industry, many of which are more worried about physical damage,
business interruption loss, bodily injury, as Ms. Mulligan
hinted on as well.
That is where there is a real challenge right now in the
marketplace, and where the focus is shifting. I am not saying
the handling of personal data is not an issue. It certainly is,
and we have seen that over the last year. There is no doubt
about that. It is much broader than that now.
Senator Moran. Do the suggestions that you have made
regarding public policy improve the circumstances for all the
silos you described?
Mr. Beeson. Certainly, as I mentioned before, I support the
threat indicator legislation. I think frankly if you talk to
experts in the security industry in particular, they will tell
you security has to become more intelligence based to tackle
this problem, and clearly threat information is key to that.
There is a whole debate about legacy defenses around
firewalls' intrusion detection systems, which is still
important, but they are not enough. How do we provide industry
with that type of intelligence, and I think public policy or
legislation proposed around threat information would be hugely
helpful.
Senator Moran. Across the board?
Mr. Beeson. Yes.
Senator Moran. Senator Blumenthal?
Senator Blumenthal. Thank you. Just to follow up on that
question, Mr. Beeson. What would that threat indicator or
intelligence look like? A requirement by the insurance company
that there be access to government intelligence or what
specifically would that be?
Mr. Beeson. In order to help facilitate an insurance
company to underwrite the risk? Is that the premise of your
question, Senator?
Senator Blumenthal. Yes.
Mr. Beeson. I will quickly, and then I am going to defer to
the underwriter here, but in my opinion, in Lockton's opinion,
I think there needs to be a change in the way insurance
companies have been underwriting this risk, which has been much
more, as I think we have heard from Ms. Sage already, a
snapshot or questionnaire, which is a sort of static look at
security, which now needs to change to something that is much
more dynamic, which is a partnership with both government and
probably the security industry to provide that type of
intelligence as part of the underwriting process.
Actually, as we heard from the Chairman in his opening
remarks, that has already started with this firm BitSite.
Senator Blumenthal. What do you think about that, Ms.
Mulligan?
Ms. Mulligan. I think Ms. Sage's testimony rightly points
out the challenges underwriters have, asking the questions. We
are trying to evaluate in an efficient way, people, process,
and technology.
Right now, we have an issue where attack vectors are
changing more quickly than I think we know how to ask the right
questions. Historically, the assumption at the enterprise level
was that it was an IT issue, and that is something that has
changed in the last 18 months, where now boards of directors
are really on notice that there has to be a high level
governance of this problem.
We really encourage a culture of awareness from the board
room to the mail room. Protection is probably not 100 percent
possible for any one company. We really look to help companies
move to resiliency rather than just protection.
Are we asking the right questions, can we ask the right
questions tomorrow when the attack vector has changed or the
attacker has changed, and then are we able to design coverage
that can respond to all the consequences of an attack?
The issues are outpacing where we are right now, so the
availability of information, underwriters think in trends, so
it is not necessarily that I need to know the specifics from a
government perspective for just Ms. Sage's industry sector or
some other sector. It helps me to think in terms of trends,
where is the frequency, where is the severity, and then that
helps me design coverage and pricing.
Senator Blumenthal. Let me ask Mr. Menapace, because you
emphasized in your testimony the importance of culture, are
companies asking the right questions? Obviously, as Ms.
Mulligan says, they have been on notice for a while about these
threats. Are they doing enough? Are they asking the right
questions, and are they acting sufficiently?
Mr. Menapace. I think there are two areas where insurers
are looking into. One, as we talk about the national database,
it would be helpful in a sense to look at industries. Is this
potential insured a retailer, are they a health care provider,
are they a manufacturer, and a national database will help the
insurers identify those trends.
When you get to the specific level of that insured,
however, insurers are trying to keep up with what are the right
questions that we want to ask of this potential insured, and
that is much trickier, there is no doubt about that. I have no
doubt that the collection and sharing of data will help in that
regard.
A number of underwriters now are looking toward what is the
business' culture toward data protection as opposed to do you
have this particular piece of software in place. That question
is almost useless.
Senator Blumenthal. Software changes and it is so dynamic.
Mr. Menapace. Yes.
Senator Blumenthal. Are there not sort of fundamental
questions? The question I heard asked repeatedly in the wake of
the Anthem breach was, why was there no encryption? In the wake
of the Target breach, why are retailers not using chip and PIN
rather than swipe technology? Evidently, chip and PIN
technology is widely used, maybe almost universally used in
Europe.
Costs and the sharing of costs and the allocation of costs
has been an obstacle. Lack of agreement on allocation of costs.
It strikes me there are certain elements to protection that
are changing. Technology is changing, the type of encryption is
changing, but the complete absence of certain techniques maybe
is reflected in the culture. Maybe that is what you mean by
``culture.''
Mr. Menapace. That is exactly what I mean. When an
underwriter can go into a business and speak with the IT, the
management, everybody, all the stakeholders, they will be able
to get a sense of that culture in the sense of what they have
now is fine, but everyone needs to realize that three months
from now, that may not be fine.
Both the insurers and the insureds need to understand this
is a continuous process because the technology is advancing so
quickly, and the threats are evolving so quickly.
My guess is the questions that insurers like Zurich and
others are asking today are going to be different questions
that they will be asking 6 months or 12 months from now of
their applicants.
Senator Blumenthal. I have other questions which I hope to
ask on a second round, but I am going to defer to my colleagues
who are here, because they are on schedules as well.
Senator Moran. Senator Blunt?
STATEMENT OF HON. ROY BLUNT,
U.S. SENATOR FROM MISSOURI
Senator Blunt. Thank you, Chairman. Thank you and the
Ranking Member for holding this hearing.
Obviously, cyber and all elements of cyber need to get a
lot of attention. I am hopeful this Congress can move forward
in a couple of different areas, data breach, as well as
information sharing.
My view on this is if we have a dramatic cyber event and
have not legislated, we will overreact, so this is an important
time for us to be having this discussion so we have something
in place when this happens.
Mr. Menapace, one of the things in the bill we voted out of
the Intelligence Committee that I serve on last week, and I am
not sure how available that bill is, but I do know one of the
topics in the bill is allowing competitors to share information
in this area, with no concerns about price fixing or any of the
things we would normally be concerned about there, but for them
to be able to share with others in the industry the kinds of
attacks they are having, fighting off successfully or not.
Do you want to make a brief comment on that as a concept?
Mr. Menapace. Certainly, Senator. The idea of sharing would
be helpful in several areas. Insurers generally are not in the
game of guessing. They rely on actuarial analyses. Without the
data to back that up, that is impossible to do.
Some insurers have robust and mature books of business but
newer entrants do not. The sharing of the data would allow new
entrants into the market, and for those existing insurers would
provide more certainty and more available data to incorporate
into their own underwriting to make sure that the premiums
charged are appropriate.
The other area where the sharing can be helpful is for non-
insurance businesses. They, too, if they had access to the data
would be able to test what is going on, what are the trends,
spot the trends, and then compare that to what are we doing
right now. If we see this trend, are our protections robust
enough that we would be able to respond, mitigate, or even
avoid that kind of loss.
Senator Blunt. Mr. Beeson, one of the things we have
consistently talked about here is some liability protection if
you followed the standards that a new Federal law would set
forth for cyber protection, and that would be one of the
elements I am sure we want to look at, but another thing I am
wondering about, is there any evidence yet of insuring against
the actual loss?
Is there anything publicly available frankly that any of
you know about these data breaches that we have already had
that would give us a sense of how much might be lost in terms
of the destruction to your internal system, the equipment, the
information, the cost it takes to replace that, and is this
something you are seeing people interested in trying to insure
against as well?
Mr. Beeson. Yes. The insurance market outside of insuring
the costs of a data breach or a violation of an individual's
privacy has also provided coverage for what is called ``non-
physical damage business interruption.''
Attacks that bring down corporate networks or impact
corporate networks, impact revenue, and other related costs
such as the cost to restore data. Those types of attacks we
know now exist.
The actual costs, as you asked, is not public knowledge, I
think, other than between a client and its insurance broker.
When you see some of these losses disclosed in 10-Ks, what have
you, as public filings, typically they seem to appear as a
total amount. It does not seem to break down those costs,
unfortunately.
In my experience, I will say at least to date, the biggest
component of a cost from a breach that involves personally
identifiable data, protected health information, is dealing
with that itself, rather than the cost on your infrastructure.
I think that is starting to change, and we have seen a
precedent from that last year where the attacks were becoming
more destructive or could certainly become more destructive,
rather than just about what they call ``exfiltrating,''
stealing data to monetize it. This goes back to how the attacks
are changing and what will be the consequential losses from
that.
Senator Blunt. Exactly. I think that is something that we
are seeing as a growing problem. Mr. Chairman, I am already out
of time.
Senator Moran. Thank you. Senator Klobuchar, welcome.
STATEMENT OF HON. AMY KLOBUCHAR,
U.S. SENATOR FROM MINNESOTA
Senator Klobuchar. Thank you very much, Mr. Chairman, for
holding this important hearing. I think we all know this is an
issue whose time has come, and we also need to spur the private
sector to increase the securities and protections.
I want to start out with actually a small business
question. We have a lot of big businesses in my state, some of
which has been kind of notable for having some cybersecurity
attacks, as you may know. While those kinds of attacks get
attention in the headlines and affect millions of customers,
many small businesses and community banks are also the victims
of these kinds of cyber attacks.
Ms. Sage, how would the insurance agency help these
businesses manage the risk of cyber attacks and provide
insurance at a reasonable rate? What do you see as the unique
challenges facing small and medium-sized businesses, and what
can we do to help them?
Ms. Sage. Thank you, Senator. I agree with a number of the
comments that have been made about company culture, and the
need to really understand what the perspective is of the
management of these small businesses toward cybersecurity
risks.
In my submitted testimony and also in my oral testimony
this morning, there were a number of themes that I have been
hearing in my travels and talks with small businesses. For
example, there is a segment of the small business community
that just does not believe this applies to them and have the
sense that they do not have information that anybody would
want.
I think it really does speak to culture. I think this is
where insurance can have a role in making it a priority for
small businesses to think about.
Senator Klobuchar. OK. Ms. Mulligan, even larger companies
with policies from several different insurance providers cannot
find policies to cover their cybersecurity needs. I know some
of our companies may often have to purchase multiple policies
with different retention levels and still have to partially
self-insure.
How does the lack of the availability of a comprehensive
cyber insurance policy affect a company's ability to manage
risk?
Ms. Mulligan. Every company will manage their risk
differently, so the idea of risk transfer is really only one
element of a risk manager's tool, available in their toolbox.
There will be decisions to self-insure, but this is where
we get back to the information sharing. The availability of
information that would help a company like Zurich determine
appropriate pricing for capacity would then allow for an
expansion of capacity, and as Mr. Menapace pointed out, for new
entrants to come into the marketplace to build out more robust
programs. We are not there yet.
Senator Klobuchar. Also, 90 percent, Mr. Beeson, of the
critical infrastructure in our country is privately held, and
these companies are on the front line, and every exercise we
have ever had where we talked with our national security
people, it is always about some kind of a private
infrastructure company. I believe it is in their own best
interest to establish robust policies.
In general, do you believe critical infrastructure sectors
in the economy and companies are taking appropriate steps? What
more do you think they should be doing?
Mr. Beeson. I think there are a lot of challenges there. I
have spent quite a bit of time looking at certain industries,
such as energy, for example, over the last couple of years. The
more you dive into that, the more you see the challenge.
I think number one is risk awareness, education on these
risks throughout the organization. Does the board realize the
differences between, for example, corporate information
technology and what is called ``industrial control systems,''
operational technology. They are very different. One is built
to be available and one is built to be secure, but they are
interlinked, and the challenges that go around that.
I would say there is a lot of work to be done in this area,
and it goes back to what I said earlier about cyber risk, cyber
insurance needs and can be an incentive to help that process,
but to do that, if we are going to look at other enterprise
assets that the insurance industry can address, and if you look
at critical infrastructure, you are now talking about physical
damage, business interruption loss.
I agree with my fellow witnesses here we need more data and
more information to help drive that process.
Senator Klobuchar. For the first time, some of our smaller
rural electric companies raised cybersecurity with me, which I
think is a sign that people are starting to see it and
understand they need to start preparing for it.
Thank you very much.
Senator Moran. Thank you, Senator. Ms. Sage, do you know,
and in a broader question to the panel, do the insured know
what is covered? Can you tell from your policy that if
something happens, it is either included or excluded in
coverage?
Ms. Sage. Chairman, the answer is no. It is very difficult,
and not just the cost of the policy, but legal assistance to
help us understand the policy, so now you have costs on top of
the policy itself to understand what your policy covers and
does not cover.
Senator Moran. What do you think your policy covers? What
events, what might happen to your company that you feel pretty
certain are covered and ones you have doubt about?
Ms. Sage. I think some of the costs associated with let's
say there was an attack and there was equipment potentially
that was compromised, those costs might be covered. I believe
costs associated with notification and things like that might
also be covered.
What is more unclear is what is not covered. We keep
hearing, well, it is claim-specific. Well, you do not know what
your claim is going to be until you have that, and hopefully
you never have that. That is a little bit of a challenge in
understanding.
Senator Moran. I do not know your business, but would you
be subjected to litigation by those damaged by the
cybersecurity, your customers or clients?
Ms. Sage. Possibly. We provide services to the Government
as well as the private sector. I think there is exposure, we
hold information that is perhaps sensitive, business sensitive,
et cetera.
In terms of what we are seeing in our Government contracts,
it is really a mix. Some agencies are more focused on
cybersecurity and including language in contracts that address
that. Others do not have anything that speaks specifically to
cybersecurity and just speak to security in general, and in
protecting the Government's information. I think really right
now it is a mix.
Senator Moran. You have heard Ms. Sage's testimony plus her
response to me. My question to the rest of the panel, are the
policies any more standardized now than when Ms. Sage described
what she went through with different companies? Mr. Menapace?
Mr. Menapace. No, there is no standardized policy language.
You may be aware, there is an organization called ISO, the
Insurance Services Office, that does provide standardized
wording for a whole line or many lines of insurance.
ISO recently did issue cyber policy wording. However, I
know of no insurer who has adopted the ISO form, and I know of
no insurer who plans to adopt the ISO form.
What we have out in the marketplace are 40 or 50 different
policy wordings for these coverages. I have to say this is an
area where brokers are important, and this is where they earn
their money, to help the insureds assess their own risks and
then match those up to the different protections that are being
offered.
Senator Moran. Do agents know--does the agent in my home
town know when the businessman or woman came to him or her--
would they be knowledgeable about this topic?
Mr. Menapace. Certainly, the big insurers do. Excuse me,
the big brokers do, certainly. The smaller brokers, if they
have taken the time to educate themselves, are valuable, and
certainly there is a group of smaller brokers who I refer
clients to for this very reason, because they have taken the
time to understand the coverages, and they take the time to go
into the businesses and assess what their risks really are,
rather than pulling something off the shelf and saying here is
cyber insurance.
Senator Moran. You said 40 or 50 companies, the market is
not yet sophisticated enough to say these are the companies
that have the best policies. Have we narrowed this down to
those who know what they are doing and those that do not?
Mr. Menapace. I am even underestimating the 40 to 50
companies, because each of those companies offer different
policy coverages depending on the size of the business, what
sector of the business they are in, and what their needs are.
The matching up of the risks and the needs will continue to
be a problem, and it is certainly something that large
businesses look at extensively, but with smaller businesses, it
takes resources to do this kind of analysis, and it takes
resources on the insurance companies as well to do individual
underwriting. That is really hard to look at individual small
businesses one at a time.
Ms. Mulligan. Mr. Chairman, the data that I have says that
five or six carriers write the coverage on a primary basis, and
those five or six carriers write approximately 70 percent of
the gross written premium, so while there is 40 or 50 markets
who may offer the coverage, it is really sort of centralized
with those markets.
The other thing I would say on your coverage question is
this is where the history of the product becomes useful and
understanding what may be covered in the event of a claim.
It was designed originally to respond to third party
liability costs arising from a network breach or a privacy
event, and now there has been the inclusion of first party
costs to a privacy breach remediation and response, which can
include some business interruption costs in the event of a
network security breach. That is really where it stands right
now.
Senator Moran. Is the market mature enough that there has
been litigation related to the coverage issue?
Ms. Mulligan. Yes. Well, I am not sure to the coverage
issues, but the litigation around liability has been evolving.
If we had been having this conversation three years ago, I
would have told you the cases were not getting through to
discovery. That is not the case now. The plaintiff's bar is
asserting new theories of liability; they will continue to do
that.
Senator Moran. That would be in instances maybe where it
was not even necessarily the intention of the insured to have
that coverage, but you look at the policy and maybe this is
covered and then you litigate it?
Ms. Mulligan. Well, no. I am thinking specifically around
security and privacy liability policies, meaning the liability
is arising from alleged mishandling of data or breached
personal data.
Those are still evolving in courts. We do have some
publicly available information about the significant breaches
that have happened in the last 12 to 18 months.
One major retailer reported recently that their first party
costs are over $250 million and rising right now, but their
liability costs to their customers and potentially to financial
institutions are still playing out in the courts. We do not
know where that will land at the moment.
Senator Moran. Do the policies provide limitations on
coverage, an amount not to exceed something?
Mr. Beeson. Could I just make an additional comment? I do
not want the Committee to get the perception that all these
insurance policies are different, some are covering one thing,
and some are covering another. That is not actually the case.
Yes, I absolutely agree the actual policy language is
different from one insurance company to another, but if you
really boil it down, the specialist policies are trying to
cover fundamentally three things.
Number one, costs of dealing with the breach response,
notification, forensics, credit monitoring, that type of thing.
The other two buckets really fall into liability coverage, to
your point, Chairman, the second one being privacy regulatory
action, you are sued by a regulator, and it is the cost of
defending yourself against that and any civil fine you could be
hit with.
Finally, the third one being civil action, for example, a
suit in class. It could be from the banks, the individuals who
own the data.
Really most of the policies in the marketplace are trying
to address those three things. Yes, they are doing it sometimes
in different ways. Yes, there are exclusions here where there
might not be in another, and a broker has to navigate that on
behalf of their client, and that is where one broker is better
than another.
I think it is important just to say although it is not
commoditized and it is not commoditized because frankly it is
still a new area of risk, there is some sort of streamlining in
that regard.
Senator Moran. Thank you. Senator Blumenthal?
Senator Blumenthal. Thank you. Those three areas, the first
two areas seem very much alike in terms of both being
responses, that is to say notification, aid for consumers who
may be harmed, and then the regulatory response. The third is
somewhat different. Is that correct?
Mr. Beeson. The biggest difference between one and two and
three is that one is a first party loss, so it is under your
legal obligation typically at state level to notify
individuals. The first party, costs you have associated with
that, follow on from that.
The other two are liability. A third party, whether that is
a regulator or somebody else, has to come along and take action
against you. That is the fundamental difference between one and
two and three, if that makes sense.
Senator Blumenthal. How would you define the third?
Mr. Beeson. It is a civil action, so it could be a bank
suing a merchant for the cost of canceling and reissuing credit
cards. It could be the victims who own the credit cards who sue
in a class action to recoup their costs.
There is another area that is emerging, but it is starting
to emerge, which is of course the board now gets sued
potentially as well under a derivative action from the
shareholders. That is something that is starting to emerge as
well.
Senator Blumenthal. Mr. Menapace, I do not know whether you
had the same kind of analysis in your statement, and I do not
have it in front of me, that more than half the costs of a
breach involve the responses like technical forensics
investigations, attorney oversight, breach notification, credit
monitoring, call centers, public relations services, and the
other half being legal defense, settlement, regulatory
response.
In effect, you are saying half the costs are in that first
category of responses?
Mr. Menapace. The industry surveys that I have seen have it
ranging anywhere from 45 to 50 percent, and some slightly more
than 50 percent, but that is what we have seen to be the cost
drivers.
I am not sure that amount or those statistics cover what
Mr. Beeson was talking about, however, which is the cost of
damaged infrastructure, which there is not public information
about that, but certainly with the reportable and the
discoverable data that we have been able to find, that is
accurate, Senator.
Senator Blumenthal. I understand that in talking about
captive insurance, it is basically self-insurance or very much
like self-insurance, because a company establishes in effect a
wholly-owned subsidiary or an entity to protect itself from
risks, and it is insured through that captive entity.
My concern is that these types of arrangements could result
in private companies in effect reaping the financial benefits
of collecting personal data, but the costs could still be
spread or socialized among consumers and taxpayers if they
underestimate the risks. In other words, the benefits go to the
company but the costs hit the consumers.
If companies use this self-insurance approach, cyber
insurance, but do not have the funds to adequately cover the
costs of cyber incidents, the companies would not have funds
available to compensate consumers whose information has been
stolen. In other words, in that sort of category of costs where
consumers, third parties, are impacted.
Are you aware of captive insurance being used in the cyber
insurance market?
Mr. Menapace. That is an interesting issue with the captive
insurance companies, as you have stated it. Certainly, for
companies that have difficulty placing their risks or need
additional capacity or perhaps have a large self-insured risk
before insurance attaches, and those companies have or will set
up captive insurers.
I would be interested to see how that plays out, and I
think that is an area where state regulators who do regulate
these captives as they do what we think of as regular insurance
companies--we will have to take a look at that to see if
companies are shifting this risk to their captive insurers.
As insurers have difficulty, both pricing and setting
reserves for losses, captives who would necessarily have even
less data to go on, this would have to be taken very seriously
by the regulators if we do see a trend in people or businesses
transferring the risk via the captive insurer.
Senator Blumenthal. Is there active discussion of the use
of captive insurance for cyber?
Mr. Menapace. I know that the NAIC is looking at the cyber
insurance marketplace in general. I do not know if there is
specific discussion within that group with the captive
insurers.
It would be interesting to know if some of the large--I do
not know but I would be interested to know if the regulators,
the individual state regulators, who have large captive
populations domiciled in their states are looking at that.
We also know many captives are regulated offshore in other
countries. I do not have statistics on that, but it does raise
a good point, an important point, which is are these captives
set up and appropriate for that kind of risk.
Senator Blumenthal. Right, exactly. Thank you, Mr.
Chairman.
Senator Moran. Thank you, Senator Blumenthal. On a national
database, on that concept, there are some who have general
concerns about the Federal Government running that database,
and then if you reach the conclusion they should, then the
question becomes who is that, is that the Department of
Homeland Security or Treasury. Is there a public/private
partnership.
Is there an outsider that could effectively run a database
that we could then rely on? I think the National Association of
Insurers is working on this topic. Is there a conclusion or
direction they are going?
Ms. Mulligan. I can comment that the Department of Homeland
Security has had three different working groups over the last 2
years, and now has commenced another group. We have had one
meeting so far. We are just starting off.
Because your questions are exactly right, these are the
details that need to be ironed out really. In theory, the idea
of a data repository is a good one, but the question of
ownership, who has access, what kind of information would be
put in there, how would it be anonymized, and then how would it
be made most useful to the insurance community and the non-
insurance community.
These are all the questions that we have on the table right
now as part of the working group.
Senator Moran. On information sharing analysis centers,
does the insurance industry have one?
Ms. Mulligan. We do not have one centralized place for this
line of business. Mr. Menapace mentioned ISO. ISO is an
organization that has information about a multitude of
insurance.
As I mentioned in my testimony, this line of business is
something that is largely purchased by specific industry
segments, so we do not have data for every single company
irrespective of industry, irrespective of size. We just do not
have that data that way, so we are unable to really create
those trends from ISO or anywhere else.
Individual insurers are relying on the data that we have
about our cyber customers, and we can use information and
extrapolate it from general liability and other lines of
business where we have experience. That is quite fragmented.
Senator Moran. Should it be a public policy goal of having
ISACs in a wide array of arenas, industries, businesses?
Ms. Mulligan. Well, to the extent that it would help us
differentiate coverage, and as Ms. Sage pointed out, price, by
industry segment, that might be useful. Again, I think we have
an issue of a lot of details that would need to be ironed out.
Senator Moran. Ms. Sage, do you participate in an ISAC?
Ms. Sage. Not officially. I think one of the challenges for
a lot of small businesses is we do not fit neatly into specific
industry segments. I know that was part of the discussion
around the ISAOs, of which ISACs are considered a type.
As a small business, we are on the ground. We are really
just trying to get new customers, keep our customers, et
cetera. Some of these activities that require a lot of
resources, participating in working groups, attending meetings,
these are things that typically we just do not have a lot of
time and resources for.
Senator Moran. Senator Gillibrand and I have discussed
legislation that would create a tax credit for the
participation in an organization like that. Does that have any
appeal to you or to the industry?
Ms. Sage. Absolutely. As I mentioned in my testimony, even
things like the voluntary NIST Cybersecurity Framework, if
insurers could even consider that, like the other ISO, the
international standards organization, that sometimes is used as
a way of understanding what areas of emphasis an organization
has, whether it is quality, risk management, et cetera.
Using something like the Cybersecurity Framework could be a
factor, so we do not have to worry now about what specific
questions do we have to ask this company or that company. At
least it could begin to move us in that direction. Offering
incentives for small businesses to use the Framework, for
example, would really be helpful.
Senator Moran. Thank you. I am going to see if Senator
Blumenthal has any additional questions in another round, and
before we conclude, I want to give you a chance to tell us
things you wish you would have said or you wish we would have
asked you.
Senator Blumenthal. I do not have any further questions,
but I may follow up in writing with some, and I want to simply
thank everyone on the panel for being here and contributing so
well today.
Senator Moran. Anything you would like to make certain that
we know?
Mr. Beeson. I would just leave the thought that certainly
at Lockton we view the opportunity as a market incentive as
much as anything to where the insurance industry has a role
right now to help drive better security. That is the key
component, I think, as far as we are concerned.
Thank you for the opportunity to testify today.
Senator Moran. Thank you for your testimony. Anyone else?
Ms. Mulligan. Thank you. I would just comment the
importance of the public and private sector cooperation in this
arena, this problem is just too large to be solved by just an
insurance solution.
Having said that, the insurance community really is in a
great position to contribute to the risk management
conversations and issues, and I think it is essential to get
the conversation out of the IT focus only, so we can really
help companies move to a place of a culture of awareness and
resiliency rather than protection.
Senator Moran. Thank you.
Ms. Sage. I would just thank you again for this
opportunity. There is a saying, if you are not at the table,
you might be on the menu. As small businesses, we appreciate
the attention and consideration of small businesses in any
legislation that you are considering.
Senator Moran. Ms. Sage, I felt very guilty when you told
me that in a sense your every day effort is to survive, get new
customers, and grow, which I very much support. I feel badly
that we invited you to Washington, D.C.
Ms. Sage. I actually live locally.
Senator Moran. Very good. Mr. Menapace, anything?
Mr. Menapace. Senator, I appreciate the fact that you
commented before that you had taken a look at our written
testimony, which is obviously more extensive than we were able
to present here today. I stand on that testimony, but I am
willing to provide answers to any written questions that the
Committee may have afterwards.
Senator Moran. Thank you very much. In that regard, the
record will remain open for 2 weeks for members to submit
questions, and we would ask you to respond to those as quickly
as possible.
With that, the Subcommittee hearing is adjourned.
[Whereupon, at 11:19 a.m., the hearing was adjourned.]
A P P E N D I X
Response to Written Questions Submitted by Hon. Jerry Moran to
Ben Beeson
Question 1. What challenges do brokers like Lockton face when
determining whether to participate in the cyber insurance marketplace?
What types of information would be helpful to better analyze risk?
Answer. The primary barrier to entry for a broker seeking to advise
their client is education. Driven by the fear of lost business and the
high profile of cyber risks that now exists many brokers are developing
a greater knowledge base and understanding. However, it is probably
fair to say that you can still count on one hand those brokers that
have the resources to handle a Fortune 500 client.
The biggest challenge to brokers once they begin to advise clients
is risk quantification. What is the consequential loss value to the
client following some form of cyber event? There is some ability to
quantify losses that involve personally identifiable information or
protected health information. However, no actuarial data exists at all
for losses involving property damage, business interruption or bodily
injury.
The insurance industry also a very little information on the
frequency and severity related to the types of attack vectors, and the
mitigation tools used that were or were not successful.
The net result means that brokers have a difficult time explaining
to clients how much money they should invest in cyber security,
particularly the cost of transferring residual risk through insurance.
Question 2. Are there countries outside of the U.S. who have
developed a functioning cyber insurance market? What lessons can we
learn from those countries?
Answer. No. The U.S. is really the only fully functioning cyber
insurance market driven by mandatory data breach notification laws.
Internationally the requirement to disclose is sporadic and businesses
do not yet perceive enough of a severity risk to warrant buying
insurance. However, the emergence of physical damage risks from cyber
attacks suggest that international take up could now accelerate.
Question 3. How has the NIST framework helped your company to
participate in the cyber risks insurance marketplace?
Answer. Yes very much so. The NIST framework has helped Lockton
articulate a governance and enterprise wide risk management approach to
boards of directors and senior executives. Cyber insurance forms part
of that discussion.
Question 4. One cost in addressing a data breach is legal support
to comply with the patchwork of state data breach notification laws.
Would a uniform national data breach notification standard improve the
cyber insurance marketplace? Why or why not?
Answer. Yes. It would help our clients--businesses--respond faster
to those whose data has been compromised. Improved incident response
should also help our clients mitigate both their regulatory and civil
liability, leading to fewer losses to insurers and ultimately a more
competitive premium structure for buyers.
______
Response to Written Questions Submitted by Hon. Jerry Moran to
Catherine Mulligan
Question 1. Are there countries outside of the U.S. who have
developed a functioning cyber insurance market? What lessons can we
learn from those countries?
Answer. There are a number of countries in addition to the U.S.
that have functioning cyber insurance markets. The UK, France, and
Australia have experienced moderate Gross Written Premium growth over
the past few years due to an increase in interest and buying behavior
from companies operating in highly exposed industries such as finance/
banking, retail, healthcare and hospitality. Markets are also beginning
to take shape, albeit more slowly, in a number of other countries such
as Canada, Hong Kong, Singapore, Spain, Germany, Switzerland, Italy,
and Mexico just to name a few. Buyers of cyber insurance outside the
U.S. tend to place more value on first party coverage grants such as
privacy breach costs and business income loss as opposed to third party
liability coverage. This is generally due to lower frequency of
litigation resulting from data breach incidents. However, this may
change as more and more countries pass more stringent data privacy
laws. Ex-US buyers also perceive significant value in pre and post
breach service capabilities offered by each carrier, or service
providers with whom carriers partner, relative to risk assessments,
forensic investigations, fraud remediation, legal advice, and public
relations.
Question 2. How has the NIST framework helped your company better
understand the preparedness of the companies you seek to insure?
Answer. The NIST framework is a useful tool for risk managers to
use in identifying their exposures and any gaps in best practices. This
mapping process may help them take corrective action if necessary and
make decisions around risk transfer. It creates a common vernacular for
IT professionals, risk managers, and underwriters to use in the
discussion of cyber security and privacy event exposures and controls.
To the extent this tool brings forth information about a company's
awareness of their risk landscape, it creates a good dialogue with
underwriters. But good cyber security and privacy practices are not
just an IT issue; an underwriter must review people, process, and
technology. We look for an overall culture of awareness, which cannot
be summarized in any one document or tool. Moreover, the exposure
landscape is moving too fast for the underwriting community rely on one
single tool or method. Still, the NIST framework has established an
effective methodology for building our collective understanding of the
exposures and controls in this space.
Question 3. One cost in addressing a data breach is legal support
to comply with the patchwork of state data breach notification laws.
Would a uniform national data breach notification standard improve the
cyber insurance marketplace? Why or why not?
Answer. A company cannot rely on one single approach to responding
to data breaches due to the variety of reporting requirements under the
various state statutes. There is no single definition of Personally
Identifiable Information, nor is there a standard requirement around
the way notification must be sent, to whom it must be sent (including
the States' Attorneys General), and in what time frame. Companies
express confusion around which laws apply to them in different
circumstances. There is also confusion about when and how to report an
event to their insurers under the policy requirements. A uniform
standard could streamline process for the enterprise, consumers, and
the insurance community. This would help get information to consumers
in a timely fashion as well as mitigating tools such as credit and
identity monitoring. There could be cost benefits to the company and
their underwriters, which could contribute to the development of
improved pricing methodology for this line of insurance.
______
Response to Written Questions Submitted by Hon. Jerry Moran to
Ola Sage
Question 1. What are the biggest challenges for a small or medium-
sized business like yours in determining whether or not you need cyber
risk insurance?
Answer. There are three primary questions that a small business
like e-Management should answer in considering cybersecurity insurance.
(1) Do We Really Need It?
According to a threat awareness poll of small businesses conducted
by Symantec, 50 percent of small to medium-sized businesses
don't feel they are at risk because they are a small business
and are therefore not a target for cyberattacks. The reality is
very different. Over the past few years, small businesses
represent the fast growing segment for cyber-attacks according
to data from Verizon's annual data breach report. There are
many reasons that small businesses are richer targets for cyber
criminals. A very common experience is that many small
businesses do not have the resources to invest in the same
level of protection that some larger organizations do, thereby
making them easier targets to compromise. At the core is the
question, ``what do small businesses have that cyber criminals
want?'' The answer is data. This data can be about the small
business itself (e.g., employee information, personal
information about the principals of the business, confidential
or proprietary business information, etc.) or it can be data
about people or companies that the small business is connected
to (e.g., professional colleagues, high profile customers or
celebrity clients, vendors or suppliers, professional
organizations, etc.). Armed with this knowledge, every small
business must then ask the question, what would our legal and
financial exposure be if the data we hold or have access to is
compromised? Industry reports indicate that the average cost to
a small business to recover from a significant cybersecurity
attack is estimated at $300,000. For many small businesses the
cost exceeds their ability to cover such exposure and
significantly increases the likelihood that a small business
shuts its doors.
Cybersecurity insurance can be an effective tool in helping to
mitigate financial risks associated with a cyber-breach. Small
businesses are wise to at least learn what cybersecurity
insurance products are available and consider whether or not it
make sense for their business. While this type of insurance is
relatively new, several leading insurance providers now offer
separate cybersecurity insurance policies that small businesses
can take advantage of.
(2) Does It Cover What We Need?
During our process of comparing policies, we found it virtually
impossible to compare policies against one another as the
language used in one policy differed from the next. An
experienced and knowledgeable broker is a must have to help
interpret what the different insurance products cover. Having a
multi-faceted cybersecurity policy is ideal. This type of
policy covers costs associated with notification, incident
response, legal, regulatory fines, etc. Keep in mind that costs
associated with equipment replacement or refurbishment may
already be covered by other general liability or business
insurance. Importantly, small businesses must understand that
cybersecurity insurance is not a silver bullet and cannot cover
things like company downtime, reputational damage, loss of
business, or intellectual property theft.
(3) Can We Afford It?
The cybersecurity insurance market is in its infancy with only
about 50 insurance carriers issuing policies.\1\ As a result,
the cost to purchase a policy can range from a couple thousand
dollars to tens of thousands for a small business. This is out
of range for a large number of small businesses. However, we
believe cybersecurity is about risk management. It boils down
to how much risk a small business willing or able to take. The
question small businesses should ask is ``can we afford NOT to
invest in cybersecurity insurance?'' As small businesses answer
this question, they should consider, at a minimum, what
industry or sector their business is in (e.g., critical
infrastructure like energy, financial services, healthcare),
what valuable data could be compromised, are there other
alternatives to cybersecurity insurance to reduce or transfer
some of the financial risk?
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\1\ Cyberattack Insurance a Challenge for Business, The New York
Times, June 8, 2014
In addition, small businesses should make sure they communicate to
their insurance underwriters, directly or through their
brokers, what they are doing to implement reasonable
cybersecurity measures or what steps they have taken to
strengthen their cybersecurity posture. These are factors that
insurance underwriters can take into consideration when
evaluating an application, and may result in more affordable
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pricing.
Summary
At e-Management, we considered these three questions and came to
the conclusion that for our business, cybersecurity insurance
was a necessary business investment. We recognize that for a
variety of reasons, cybersecurity insurance may not be the
right solution for all small businesses. However we encourage
small businesses from start-up phase to those who are planning
an exit, to at least start the conversation about whether or
not cybersecurity insurance is right for their business based
on their answers to these three straightforward questions.
Question 2. Has the process of seeking cyber risk insurance helped
your company improve its cyber posture? If so, how?
Answer. At e-Management, we are using the NIST Cybersecurity
Framework to improve our cyber posture. We view improving our posture
as good cyber hygiene, a competitive differentiator, and an indication
to our clients and partners that we take protecting their information
seriously. Cybersecurity insurance is one of several tools in our risk
mitigation portfolio to help reduce or transfer some of the financial
risk associated with a potential breach.
We believe cybersecurity risk insurance can play an important role
in driving companies to improve their cyber posture by stipulating
specific requirements. Examples could include policies and procedures
that address cybersecurity, baseline technical requirements for company
network infrastructures, and demonstration of a company's ongoing
cybersecurity risk management approach.
Question 3. One cost in addressing a data breach is legal support
to comply with the patchwork of state data breach notification laws.
Would a uniform national data breach notification standard improve the
cyber insurance marketplace? Why or why not?
Answer. It is unclear how much a national data breach notification
standard would ``improve'' the cyber insurance marketplace.
Conceivably, having some degree of consistency among the approximately
48 current state notification breach laws could help companies doing
business in multiple states lower legal costs associated with
interpreting and complying with the various notification requirements.
Over time, this could provide insurance carriers with better data about
the costs associated with breach notifications which are covered by
most cybersecurity insurance policies today. Ultimately better data
should lead to better decision-making, resulting in better pricing of
cyber insurance products over the long term.
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