Understanding and Selecting Cyber Insurance

Cybersecurity insurance first emerged in the late 1990s as a response to the growing reliance on technology and increased cyber threats, hacking attacks, and data breaches. The first available policies were relatively basic and primarily focused on data theft.

The market for cyber insurance has evolved significantly since then. Coverage and policy options are now more sophisticated and tailored to address a wide range of cyber risks, such as ransomware, social engineering attacks, critical system failures, and operational interruptions or lost revenue due to cyber incidents.

First-Party Insurance

First-party cybersecurity insurance coverage protects your organization against direct losses, expenses, and other damage from a cyber incident. Businesses that store sensitive data, such as their customers’ credit card information, often invest in first-party insurance. First-party cyber insurance usually includes coverage for:

• Data Breach Response – First-party coverage typically includes expenses related to responding to a data breach, such as the costs for forensic investigations, notifying affected individuals, providing credit monitoring services, and employing public relations efforts to manage potentially massive reputational damage.
• Business Interruptions – First-party cyber insurance helps compensate for financial losses incurred due to business interruption caused by a cyber incident. Policies can include reimbursements for lost revenue during downtime, extra expenses for maintaining operations, and other costs associated with restoring systems and data to pre-incident status.
• Cyber Extortion – First-party coverage may include protection against cyber extortion threats, such as ransomware attacks in which malicious actors encrypt and hold critical data hostage for money. First-party cyber extortion coverage can reimburse ransom payments, expenses related to negotiating with attackers, and associated costs for restoring data and systems.
• Cybercrime – As cybercrime becomes more sophisticated, today’s first-party insurance is developing coverage for new and evolving types of attacks. Cybercrime coverage typically includes losses resulting from fraudulent electronic funds transfers, social engineering scams, and employee insider theft of valuable, sensitive information.
• Regulatory Compliance – Depending on the specific industry or nature of the insured organization, first-party coverage may help cover fines, penalties, and legal expenses resulting from regulatory investigations and enforcement of data breaches or privacy violations.

Third-Party Insurance

Third-party cybersecurity insurance coverage protects your business against claims and lawsuits from third parties, such as customers, regulatory agencies, and partners throughout the supply chain. Third-party policies cover the fallout of attacks or data breaches on a company’s clients’ networks or systems. The key elements and main types of third-party liability insurance often include:

• Data Breach Liability – Third-party coverage typically includes coverage for legal defense costs, settlement arrangements, and judgments that arise from a third party’s lawsuit alleging negligence or failure to protect sensitive information. Victims may sue any parties responsible for or contracted to work on the network if an organization sustains a breach.
• Privacy Liability – Third-party cyber coverage extends to claims alleging violation of privacy laws or regulations, such as the unauthorized disclosure of personally identifiable information (PII) or protected health information (PHI). Third-party privacy liability coverage is essential for organizations handling sensitive personal information.
• Media Liability – Third-party coverage may include protection against claims of defamation, libel, or slander arising from content and information published on company websites, social media platforms, or other digital channels. Media liability coverage also protects organizations from claims of intellectual property infringement.
• Network Security Liability – Third-party coverage for network security liability protects organizations against claims alleging that their network security measures failed to prevent unauthorized access to a client’s network. This insurance not only helps cover the financial costs associated with cyber incidents but also assists in the recovery process, ensuring that the organization can return to normal operations as swiftly as possible.
• Regulatory Defense – Regulatory defense insurance is vital for organizations operating within industries subject to extensive regulatory oversight. This type of insurance helps cover the costs of defending against allegations of regulatory violations, including legal fees, fines, and penalties. It’s essential for entities that might face investigations or enforcement actions from regulatory bodies.

Cyber insurance protects businesses from the financial fallout of various cyber incidents, including data breaches, cyber extortion, network damage, and business interruption. Unlike traditional insurance policies, cyber insurance addresses risks inherent to the digital realm, providing coverage that conventional policies do not.

Finding and choosing the right cyber insurance policy and provider can be a complex, involved, and sometimes challenging process. However, with the global average data breach cost reaching $4.45 million in 2023, cybersecurity insurance represents an affordable investment in business owners’ peace of mind.

Choosing the Right Cyber Insurance For Your Business

Assess Your Risk. Before sourcing quotes and lining up prospective insurers, it’s critical to conduct a thorough risk assessment to identify potential vulnerabilities and areas of financial exposure to cyber threats. Identify your organization’s most valuable digital assets, including proprietary data and sensitive personal information. Assess their level of risk and the likelihood of experiencing a cyber incident. Risk and vulnerability assessment exercises can provide helpful insight to help determine the appropriate amount of coverage and other policy requirements.

Determine the Right Coverage Amount. Choosing the right coverage amount is critical and should be based on a detailed analysis of your business’s risks, potential exposure, and the financial impact of various cyber incidents. You may need to consult a cyber insurance specialist or broker who can help you understand your risk profile and recommend appropriate coverage limits.

Find Coverage That Meets Your Needs—and Goes Above and Beyond. Like many cybersecurity solutions, cyber insurance doesn’t come in a one-size-fits-all preset package. In addition to your organization’s specific risks related to the types and volume of data you handle, the amount of coverage you need will depend on factors such as company size, industry, revenue, and overall security posture.

Ask What to Expect if a Cyberattack Strikes. A cyberattack or data breach can span several areas of your business and have various financial impacts. It’s crucial to comprehend a cyber incident’s total costs and economic disruptions, which could hinder your ability to make sales and lead to lost revenue. In addition to disrupting your business operations, you may need to retain legal expertise, communicate the incident to customers or vendors, pay for monitoring services for impacted parties, and rebuild your business’s hard-earned reputation. 

Your organization must be able to rely on its cyber insurance provider in the wake of a debilitating cyberattack. Be sure to inquire with every prospective insurer about the specifics you can expect if you experience a cybersecurity incident. Seek cyber insurance coverage offering relief in all areas so you can recover and get back to business as quickly as possible.

Research Your Options. Do your due diligence in researching providers and policy options. Obtain detailed quotes from multiple insurers to compare coverage options, premiums, deductibles, and other considerations. Scrutinize what is covered and, just as critical, what is not. Don’t assume all types of cyber incidents are automatically covered. While ensuring your organization receives adequate protection, you don’t want to pay for coverage you don’t need. 

Most organizations can’t operate without some form of business insurance. General liability, product liability, commercial liability, and professional liability policies are among the business insurance industry’s most common risk management methods. These business liability insurance products can cover many tangible assets and conventional liabilities. However, they seldom include adequate coverage for the potential harm of increasing digital risks and cyber threats.

Necessary insurance coverage fluctuates on a business-by-business basis. Service organizations are unlikely to require product liability coverage, for example. While every company’s risk profile is unique, most can benefit by purchasing cyber insurance coverage.

• Technology Companies – Software developers, IT firms, and cloud computing providers were among the first to adopt cyber insurance in its early days. Technology-oriented companies can face cyber risks related to their products and services and potential vulnerabilities within their systems and infrastructure.
• Healthcare Organizations – Major hospital systems, private practices, health insurance companies, and other medical providers store vast amounts of sensitive patient information, including protected health information (PHI). Due to the volume and private nature of PHI records housed by many healthcare organizations, they’re frequently attractive targets to cyber criminals launching breach attempts and other cyber threats. 
• Financial Institutions – Banks, credit unions, investment firms and other financial services corporations house large amounts of customers’ personal information and financial transaction data, making them prime targets for financially motivated cybercriminals.
• Retailers – E-commerce retailers, brick-and-mortar stores, and collective online marketplaces process and handle a significant volume of customer transaction data and payment information. As such, they are a prime target for data breaches and e-commerce threats.
• Public Sector Organizations and Government Agencies – Federal, state, and local governments and public education institutions are attractive targets for cyber attackers who wish to disrupt services or steal data. Private companies and cybersecurity providers who work with the public sector face strict compliance regulations and security protocols. The vast amount of personal information within government and education databases ensures they remain frequent and high-priority cyberattack targets.
• Critical Infrastructure – Organizations that operate critical infrastructure, such as public energy utilities, transportation systems, telecommunication networks, and other essential services, possess a wealth of sensitive user information. Cyberattacks on such organizations can have widespread and far-reaching consequences on public safety or security, causing disruptions and distraction from further attacks.
• Manufacturing Firms – Major manufacturers rely heavily on networked and industrial control systems to operate facilities and manage production processes. Cyberattacks targeting these systems can cause costly operational disruptions, production delays, and physical damage to products or equipment.
• Professional Services – Professional services organizations, including legal, accounting, and consulting firms, handle sensitive and highly confidential client information. In addition to general breaches or ransomware attacks, professional services firms are targets for intellectual property theft, corporate espionage, or financial fraud.

In today’s digital economy, virtually every organization that relies on technology to conduct operations, communicate with customers or store sensitive information can benefit from cyber insurance coverage. Large, high-revenue enterprises make for lucrative cyberattack targets due to potential financial spoils. Meanwhile, small and mid-size businesses often lack the resources or expertise to implement robust security measures for every vulnerability. Cyber insurance can go above and beyond organizations’ traditional business insurance, providing essential protection against financial losses from cyber incidents.

Cyber insurers are evaluating potential risk more closely than ever, primarily due to a skyrocketing number of claims that have led to provider losses in the wake of the COVID-19 pandemic. Organizations shopping for cybersecurity insurance today and in the future can expect more detailed questionnaires, more testing of existing security measures to assess risk, and more strict underwriting practices. Emerging trends in cyber insurance include the following.

Cybersecurity Score as a Factor in Premiums – Similar to credit scores, some insurers are now considering a company’s cybersecurity score — a measure of their cybersecurity posture — when determining premiums. Companies with better cybersecurity practices may benefit from lower insurance costs.

Expansion of Coverage to Include Newer Risks – Insurers are beginning to offer policies that cover emerging risks such as cryptocurrency theft, supply chain attacks, and damage from state-sponsored cyberattacks.

Integration with Cybersecurity Services – Some cyber insurance providers are bundling insurance products with cybersecurity services, offering financial protection and proactive risk management tools, including monitoring services, risk assessments, and incident response support.

Peer-to-Peer (P2P) Cyber Insurance – P2P insurance is a novel approach that allows businesses to pool resources and share risks, potentially lowering costs and fostering a community-based approach to cyber risk management.

These trends highlight the insurance industry’s commitment to innovation in the face of evolving cyber threats. By adopting new technologies and expanding coverage, insurers aim to provide businesses with the tools and protection they need to navigate the digital age securely.