The Road to Cyber Insurance Optimization Is Paved With Quantification
Managing cyber risk has become a critical business process, and as the likelihood of experiencing an incident continues to rise, along with its associated potential costs, organizations have increasingly begun to turn toward cyber insurance. Although cyber insurance is relatively new to the market, it has already demonstrated its value for mitigating cyber risks. Research reveals that organizations with stand-alone cyber insurance policies are less likely to experience a breach.
To capitalize even further on cyber insurance's benefits, businesses can utilize cyber risk quantification (CRQ), a process that illuminates the spectrum of financial damages an organization may face according to standard cyber insurance loss scenarios and their likelihood expectancy.
Using these quantified insights, in combination with peer insurance benchmarks, business executives can understand how likely they are to exceed their current policy's deductible, equipping them to negotiate for better premiums, limits, and sub-limits.
Cyber insurance can be an extremely viable option for cyber risk management, but to optimize terms, conditions, and economic value, it's crucial to have benchmarks and quantified data points that can aid strategic decision-making and negotiations.
Cyber Risk Is a Business Risk That Must Be Managed
Risk is an inherent part of conducting business, and thereby, so is its management. The first step in this essential business process is conducting a thorough risk assessment, followed by carrying out calculated mitigation plans, of which there are three primary ones:
Internal risk alleviation efforts
Absorption of the potential costs into risk appetites
Transferring the risk to a third-party insurance provider
The third option has proven to be consistently effective in several operational areas. For instance, nearly all organizations today have, among other types, General Liability, Commercial Property, Workers' Compensation, and D&O insurance policies. Indeed, if it's a common business risk, stakeholders are likely to insure it.
In the modern digital era, where the majority of market operations are now conducted online, this tendency has started to ring true for a relatively new type of risk: cyber. To better manage the looming threat of a cyber event and safeguard business integrity, organizations are increasingly turning towards cybersecurity insurance as a viable option.
Cyber Insurance: Making the Most of a Burgeoning Industry
Formal business insurance first emerged in the 17th century. Consequently, by now, agencies have had plenty of time to amass data, hone terms and conditions, and determine appropriate premiums for each policyholder. Cyber insurance, on the other hand, has only existed for less than a couple of decades, making this process much more infantile.
In spite of this newness, adopting standalone cyber insurance policies has already proven beneficial to key market players. Research demonstrates that companies that have opted for cyber insurance are significantly less likely to experience a data breach. Likewise, they enjoy the benefit of offsetting some of the costs associated with an incident, which otherwise add up quickly.
While the advantages of transferring risk to a third-party agency are clear, there is still plenty more to be gained. For example, with on-demand cyber risk quantification (CRQ), organizations can gain objective insights into their unique risk landscape, illuminating both the likelihood of experiencing an event and the relative financial costs.
Businesses can likewise leverage industry benchmarks, enabling them to determine if their policies align with key peers and, if not, negotiate for better terms. With all of these quantified figures, decision-makers are equipped with the data necessary to optimize cyber insurance terms, ensuring resiliency amidst a threat landscape that grows more costly by the day.
A Quick Overview: What Is On-Demand CRQ?
On-demand cyber risk quantification is a mathematical approach that leverages extensive cyber event, vulnerability, and exploit data, along with global insurance loss intelligence, to assess an organization's likelihood of experiencing various cyber scenarios. Among other capabilities, this software then calculates the respective financial losses according to each of the situations' probabilities.
Figure 1: CRQ reveals the range of loss scenarios likelihoods and respective financial damages.
For instance, for the organization assessed in Figure 1, there is a 4% probability that, in the coming year, they will experience a business interruption that will amount to a roughly $12.2 million loss. The quantification’s loss exceedance curve reveals that there is likewise a 30% chance that the same scenario will end up costing the organization $383 thousand, offering decision-makers a spectrum of insights that can guide financial planning.
Read the Monte Carlo Cyber Event Simulation article to learn more about CRQ methodology and how these loss exceedance curves are calculated.
Splitting Risk into Insurance-Based Loss Impact Scenarios
Certain CRQ platforms, such as the one offered by Kovrr, can break down an organization's exposure to cyber risks according to the various loss scenarios that align with standard cyber insurance coverages. These coverage categories are determined by the type of financial damage, such as legal expenses or data recovery costs, caused by a cyber event.
Figure 2: Standard cyber insurance loss scenarios, according to expense type.
The six cyber insurance loss categories are:
1. Business Interruptions Losses
This impact scenario incorporates the loss of income due to operational downtime. This category likewise encompasses any extra expenses incurred to minimize the damage (including forensic and public relations costs) and regain business continuity.
2. Ransomware & Extortion Losses
This loss category comprises extortion payments made to assuage a cyber attacker after they break into a computer system and hold critical information hostage until the ransom fee is paid. It also includes any periphery data recovery expenses.
3. Regulation & Compliance Losses
The "Regulation & Compliance" loss scenario incorporates monetary expenditures necessary in the wake of a cyber event, such as legal fees and regulatory fines. As global governmental institutions, such as the US SEC, the EU, and ARPA, continue to enact more cybersecurity regulations, the scope of these expenses is expected to expand.
4. Third-Party Service Provider Failure Losses
Although in the insurance industry, "Third-Party Service Provider Failure" is referred to as a Contingent Business Interruption, this loss category is similarly composed of dependent income expenses caused by a system failure or downtime in a third-party provider. This scenario typically occurs when a third-party service provider experiences a cyber incident of some type.
5. Third-Party Service Provider Liability Losses
This cyber insurance loss category covers the costs an organization may have to pay due to a third-party provider's negligent acts, errors, or omissions. It also accounts for any claims that allege failure to properly protect sensitive data if said data was stored within that third party’s service or solution.
6. Data Theft & Privacy Losses
These losses extend to the costs associated with a cyber event in which customer data is compromised or exposed. "Data Theft & Privacy" is one of the broader loss categories, encompassing monitoring services, notification expenses, data recovery costs, public relations fees, and lost income.
How CRQ Leads to Optimized Cyber Insurance Policies
With an on-demand CRQ platform that can illuminate the potential likelihoods and relative financial damages according to these standard insurance loss scenarios, organizational leaders gain insights that can help them achieve more targeted terms and conditions with deductibles, limits, and sub-limits that better reflect their organization’s unique risk landscape.
After gaining an initial understanding of the organization’s financial exposure, CISOs can project their current cyber insurance policy information onto the CRQ assessment outputs. This direct comparison allows cybersecurity leaders and CFOs to visualize how likely they are to exceed the deductible on an average year and thus determine if the policy is cost-effective.
For example, in Figure 3, the organization has a deductible of $4.5 million and a limit of $40 million. However, there is only a 13% probability that losses due to Business Interruption will exceed the deductible, a 10% chance of exceedance due to Data Theft & Privacy, and a 6% exceedance likelihood due to Third-Party Liability. Therefore, in an average year, there is a small likelihood that the policy will help cover any of these costs following a cyber event.
Figure 3: CRQ compares cyber insurance deductibles and limits with average loss expectancies.
Armed with these objective loss forecasts, key stakeholders can negotiate lower deductibles and limits, ensuring that, should any of these loss scenarios ensue, the policy is economical and absorbs some of the financial burden. In some cases, it may be logical to drop a specific coverage area entirely, saving on the cost of the premium. Of course, these high-level decisions should always account for risk appetite and tolerance levels.
Enhancing Negotiating Power with Peer Benchmarks
Another strategy for achieving the optimal cyber insurance policy is to harness quantified market intelligence regarding key industry competitors. For instance, if you discover that your organization's premiums are significantly higher than industry averages, the knowledge can serve as a powerful bargaining piece when negotiating for better rates.
Cyber insurance benchmarking, among other benefits, can also assist organizations in their overall cyber risk mitigation strategy and respective budget allocation. Suppose other businesses with similar characteristics are, on average, paying more than your organization is for cyber insurance. In that case, it may serve as a solid indication that more resources need to be invested in cyber insurance.
Explore LineSlip’s novel Peer Comps solution to learn more about the power of cyber insurance benchmarking.
Capitalizing on Cyber Insurance Opportunities with Quantified Insights
Transferring cyber risk by means of adopting cyber insurance is one of the most strategic moves an organization can make toward building cyber resiliency. However, to ensure that policies are optimized to meet the business’s specific risk landscape, it’s crucial to leverage solutions that can illuminate additional cyber risk metrics.
A CRQ platform breaks down an organization’s cyber risk posture according to common insurance loss impact scenarios, equipping CISOs and other executives to compare their current policy with objective loss forecasts and subsequently determine the most cost-effective course of action. Stakeholders can similarly benchmark these policy terms with industry competitors, providing even more data to formulate the optimal risk mitigation plan.
Whether opting to negotiate for lower deductibles and limits, drop coverage areas altogether, reallocate resources into more economical internal mitigation initiatives, or simply choose to absorb the risk into the organization’s risk appetite, business leaders will feel wholly confident in their cyber risk management decisions when leveraging cyber risk quantification and peer benchmarks.
Getting Access to Key Cyber Risk Metrics with Kovrr
With the cost of cyber events steadily rising and economic growth slowing, organizations must do everything possible to ensure the cost-effectiveness of risk mitigation efforts. Kovrr’s CRQ platform provides objective data regarding a business’s unique cyber risk landscape and loss impact scenarios, equipping stakeholders with the intelligence necessary for negotiating optimized cyber insurance policies.
Contact Kovrr’s cyber risk management experts today to learn more or schedule a free demo to discover specific platform features that lead to cyber insurance optimization.