Cyber Insurance

I. Introduction

Cyber insurance is a type of insurance policy that provides coverage for losses resulting from cyber attacks, data breaches and other related incidents.[1] This insurance protects organizations and individuals from financial losses incurred due to damage to or theft of sensitive information, including personal data, financial information and intellectual property.

In the past ten years, digital data has become a valuable asset and a potential risk for companies doing business online. News of data breaches and cyber crimes are reported regularly, leading the public to demand better protection for their sensitive information. Businesses in the digital age are finding that traditional insurance policies do not cover the loss or theft of electronic data, leaving them vulnerable to significant financial losses in case of a data breach.[2] According to a research conducted by Kaspersky Lab, a cyber-attack was launched every 40 seconds in 2016 and the rate of phishing attacks in 2018 was almost doubled compared to 2017. [3] Cyber insurance helps organizations and individuals mitigate the financial impact of these attacks.

Cyber attacks can result in significant business interruption, leading to a loss of revenue, customers and reputation. Cyber insurance can help organizations recover quickly and resume operations. Cyber-attacks may occur as the theft of individuals’ personal information to the theft of confidential industrial product data which may result in impersonation, fraudulent banking data use, blackmail, random demands, and power cuts. [4]

Data breaches can result in the loss or theft of sensitive information, such as personal and financial data. Cyber insurance can help organizations pay for the costs associated with responding to a breach and protecting affected individuals. A cyber attack can cause significant reputational harm, leading to a loss of trust and customers. In December 2013, Target Corporation, a major U.S. retailer, experienced a security breach that resulted in the exposure of pethe rsonal information of more than 110 million customers. This incident had a significant impact on the company's financial performance, causing profits to decrease by nearly 50%.[5] Organizations and individuals can face legal liabilities if they fail to protect sensitive information and data. Cyber insurance can help cover the costs associated with legal defense and settlements. The way that consumers perceive the security of their information can have a significant impact on their decision to make purchases online. [6] An example of this is when Sony's PlayStation Network experienced a cyber attack in April 2011, which led to the exposure of personal data for 77 million users and the compromise of banking information for thousands of players. To compensate for this breach, Sony paid out $15 million in compensation, as well as covering legal fees and providing refunds for affected customers.[7]

II. Why Traditional Insurance May Not Cover Cyber Risks

Traditional insurance policies, such as property, casualty, and liability insurance, may not provide adequate coverage for cyber risks for several reasons. Cyber risks are complex and constantly evolving, making it difficult for traditional insurance policies to provide comprehensive coverage. Cyber insurance policies are specifically designed to address these risks and provide coverage for a wide range of incidents.

As the aim of the insurance companies is to seek to minimize the impact of potential risks by identifying and addressing them beforehand, it is crucial to accurately assess the level of risk and distribute it among a large number of policyholders. This is the fundamental principle of insurance.[8] Therefore, it can be argued that insurance policies do not eliminate risks entirely. Rather, they aim to protect their customers from financial losses by distributing the risk among a larger group of individuals.[9] The same principles apply to cyber insurance as well. In order to effectively mitigate cyber threats and the risks they pose, it is crucial to have a thorough understanding of these threats. Without knowledge of the specific risks, it is impossible to develop effective strategies for managing them.[10] Therefore, it is important to define the nature of cyber risks that underpin cyber insurance. However, there is no universally accepted definition of cyber risks, despite various definitions being proposed. As a result, cyber risks are distinct from other risks that are typically covered by insurance policies.[11]

Insurers are increasingly hesitant to indemnify corporations for data breach liability under standard policies due to the unpredictable financial harm caused by a data breach.[12] Many insurers have begun writing cyber-risk specific insurance policies to provide indemnity from liability for the unauthorized disclosure of sensitive consumer information.[13] Cyber insurance is a relatively new area of insurance and there is limited information available about how competitive the market is.[14] However, it is known that the demand for cyber insurance is increasing as organizations become more aware of its potential benefits. A decade ago, most companies did not have cyber insurance, but now one in three organizations has insurance specifically for cyber and data theft losses.[15] It is clear that cyber insurance is one of the fastest-growing areas of the insurance industry, and organizations are increasingly purchasing it to manage the new risks associated with cyber attacks.[16]

III. What Does Cyber Insurance Cover

The growth of e-commerce and online businesses has led to an increase in unique cyber risks for companies, which can include property damage, lost profits, and data breaches. [17] Developing a comprehensive framework for analyzing cyber-risk losses depends on the type of business engaged in, and traditional security measures may not be effective in preventing security breaches. Interdependent security risks can occur because the security of consumer data relies on interdependent risks in a networked system.[18] The costs of a data breach can vary based on the industry and can include detection and discovery costs, escalation costs, notification costs, and ex-post response costs. Financial institutions and healthcare providers have a high duty to protect consumer data, and companies can face first-party or third-party losses in the event of a cyber attack.[19]

Coverage for first-party losses includes coverage for the costs associated with responding to a cyber incident, such as notification expenses, credit monitoring services, business interruption and crisis management.[20]

Coverage for third-party losses includes coverage for legal liabilities and costs associated with defending against claims from third parties, such as customers or business partners, who have suffered harm as a result of a cyber incident.[21] Moreover, insurance coverage for third-party liability can provide protection for the insured against legal claims of intellectual property violations, which may include infringement on software patents, copyrights, trade secrets, trademarks, as well as claims of defamation, libel and slander, invasion of privacy, unfair competition, false and misleading advertising, and unauthorized use of confidential information.[22]

IV. Conclusion

In conclusion, cyber insurance is an increasingly important tool for organizations and individuals looking to protect against the growing number of cyber risks. Cyber risks are complex and constantly evolving, making it difficult for traditional insurance policies to provide comprehensive coverage. Cyber insurance policies, on the other hand, are specifically designed to address these risks and provide comprehensive coverage for a wide range of cyber incidents, including first-party losses, third-party losses, data breach response, business interruption, cyber extortion, cybercrime, and network security and privacy liability.

However, it is important to keep in mind that cyber insurance coverage may be subject to policy exclusions, sublimits, deductibles, policy limits, and exclusions for pre-existing conditions. Policyholders should carefully review the terms and conditions of their cyber insurance policy to ensure they have adequate coverage. With the growing number of cyber incidents and the increasing financial losses associated with these incidents, cyber insurance is an essential tool for protecting against the financial impact of a cyber breach.

In today's increasingly connected world, cyber insurance is a critical component of any organization's or individual's risk management strategy. By providing comprehensive coverage for a wide range of cyber risks, cyber insurance can help mitigate the financial impact of a cyber incident and provide peace of mind in an ever-changing digital landscape.

References

• Bailey, L. (2014). Mitigating moral hazard in cyber-risk insurance. JL & Cyber Warfare, 3, 1
• Fernandes, Deirdre. 2014. More Firms Buying Insurance for Data Breaches. Boston Globe http://www.bostonglobe.com/business/2014/02/07
• Hill M. (2022). Cyber insurance explained: What it covers and why prices continue to rise. https://www.csoonline.com/article/3643054/cyber-insurance-explained.html
• Kesan, J., Majuca, R., & Yurcik, W. (2005, June). Cyberinsurance as a market-based solution to the problem of cybersecurity: a case study. In Proc. WEIS (pp. 1-46).  http://infosecon.net/workshop/pdf/42.pdf
• Luo, S., & Choi, T. M. (2022). E‐commerce supply chains with considerations of cyber‐security: Should governments play a role?. Production and Operations Management, 31(5), 2107-2126 Ogut, H., Menon, N. M., & Raghunathan, S. (2005, June). Cyber insurance and IT security investment: impact of interdependence risk. In WEIS
• Sezal, L. Sigortacılık Sektöründe Karşılaşılan Riskler Ve Etkin Risk Yönetimi. Sosyal Bilimler Dergisi, no. 17, (Aralık 2018): 186-192
• Şağban, E. E. (2021). Nft’ler Özelinde Siber Sigortaya Bir Bakış. Bilişim Hukuku Dergisi, 3(2), 430-493 Talesh, S. A. (2018). Data breach, privacy, and cyber insurance: How insurance companies act as “compliance managers” for businesses. Law & Social Inquiry, 43(2), 417-440
• Wu, Y., Feng, G., & Fung, R. Y. K. (2018). Comparison of information security decisions under different security and business environments. Journal of the Operational Research Society, 69(5),747–761. https://usa.kaspersky.com/about/press-releases/2019_kaspersky-lab-finds-phishing-attacks-hit-almost-500-million

[1] Hill M. (2022). Cyber insurance explained: What it covers and why prices continue to rise. https://www.csoonline.com/article/3643054/cyber-insurance-explained.html

[2] Bailey, L. (2014). Mitigating moral hazard in cyber-risk insurance. JL & Cyber Warfare, 3, 1, s. 1

[3] https://usa.kaspersky.com/about/press-releases/2019_kaspersky-lab-finds-phishing-attacks-hit-almost-500-million

[4] Luo, S., & Choi, T. M. (2022). E‐commerce supply chains with considerations of cyber‐security: Should governments play a role?. Production and Operations Management, 31(5), 2107-2126, s. 2107

[5] Luo, S., & Choi, T. M. (2022), s. 2107

[6] Wu, Y., Feng, G., & Fung, R. Y. K. (2018). Comparison of information security decisions under different security and business environments. Journal of the Operational Research Society, 69(5), 747–761,

[7] Luo, S., & Choi, T. M. (2022), s. 2108

[8] Sezal, L. Sigortacılık Sektöründe Karşılaşılan Riskler Ve Etkin Risk Yönetimi. Sosyal Bilimler Dergisi, no. 17, (Aralık 2018): 186-192.

[9] Şağban, E. E. (2021). Nft’ler Özelinde Siber Sigortaya Bir Bakış. Bilişim Hukuku Dergisi, 3(2), 430-493, s. 432

[10] Şağban, s. 432

[11] Şağban, s. 433

[12] Bailey, s.4

[13] Bailey, s.4

[14] Talesh, S. A. (2018). Data breach, privacy, and cyber insurance: How insurance companies act as “compliance managers” for businesses. Law & Social Inquiry, 43(2), 417-440, s. 419

[15] Fernandes, Deirdre. 2014. More Firms Buying Insurance for Data Breaches. Boston Globe http://www.bostonglobe.com/business/2014/02/07

[16] Talesh, s. 419

[17] Bailey, s.8

[18] Ogut, H., Menon, N. M., & Raghunathan, S. (2005, June). Cyber insurance and IT security investment: impact of interdependence risk. In WEIS.

[19] Kesan, J., Majuca, R., & Yurcik, W. (2005, June). Cyberinsurance as a market-based solution to the problem of cybersecurity: a case study. In Proc. WEIS (pp. 1-46). http://infosecon.net/workshop/pdf/42.pdf

[20] Bailey, s.15

[21] Bailey, s.15

[22] Bailey, s.15