The cyber risk self-insurance challenge for corporate boards
May 25, 2021
Because the relatively young cyber insurance industry only covers a small portion of the potential economic impacts of cyber risk, the most significant "insurer" of cyber risk is corporate America, along with all companies around the world. The vast majority of the potential economic impact related to cyber risk is self-insured by the companies themselves.
Federal Reserve Chair Jerome Powell recently said in an interview: "... the risk that we keep our eyes on the most now is cyber risk." Powell also talked about a potential systemic failure of the electronic payments system and how it could negatively impact the broader financial system. The prevalence and unique nature of systemic risk in complex digital systems is challenging how companies and the federal government view and approach cyber risk management and governance.
With cyber insurers raising premiums and tightening coverage terms and limits, the most important 'insurance policy' for companies is their cyber risk governance and management activities. This is because cyber insurance essentially covers the first layer of risk, or what could be viewed as the "predictable" layer. Companies are self-insured for the catastrophic impacts of cyber, and in some cases, such as with intellectual property or reputational risk, effectively not insured at all.
JP Morgan Chase, Chairman and CEO Jamie Dimon listed cybersecurity risk first in his 2020 letter to shareholders on his list of specific issues facing the company, declaring, "Cybersecurity risk remains a significant threat." He went on the disclose how much JP Morgan Chase spends on its cybersecurity defenses to protect the bank and its customers, saying: "We cannot overemphasize the importance of cyber risk, not just to our bank (we spend more than US$ 600 million a year on cybersecurity) but also to our customers, countries, economies, and critical industries (i.e., telecom and power)…Much of our extraordinary cyber capabilities are also used to train and protect our customers, particularly in the areas of risk and fraud."
These issues place a difficult responsibility on boards and management teams to understand the potential economic impacts of their unique cyber risk profile. As Dimon pointed out, JP Morgan Chase has also extended mitigation to its customers in recognition of the systemic threats and risks that exist throughout complex digital business systems.
New York's Department of Financial Services, the state's insurance regulator, recently issued its first Cyber Insurance Risk Framework, which specifically advises cyber insurers to understand the systemic risks they are underwriting. The agency warned: "In addition to overall rising costs, insurers must account for the systemic risk that occurs when a widespread cyber incident damages many insureds at the same time, potentially swamping insurers with massive losses. "
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The cyber risk buck ultimately stops with every company's boardroom and management team. The vast majority of the economic impacts of cyber risk cannot be insured away.
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The agency also commented on the insurance industry vs. self-insurance dynamic, adding: "Insurers that don't effectively measure the risk of their insureds also risk insuring organizations that use cyber insurance as a substitute for improving cybersecurity, and pass the cost of cyber incidents on to the insurer."
The cyber risk buck ultimately stops with every company's boardroom and management team. The vast majority of the economic impacts of cyber risk cannot be insured away by transferring them to a third party, which presents companies with a growing cyber self-insurance challenge.
While many boards receive various threat intelligence and other cyber risk metrics from their management teams, the connection between cyber threats and their potential economic impacts is usually less developed. The economic and non-economic impacts of cyber risks take many forms and range from the direct loss of revenue to reputational damage. Cyber threats can generally be segmented into four main categories: data breaches, business interruptions, asset misappropriations, and cyber ransom and extortion.
As a result of each of these primary threats, there are wide ranges of economic impacts and losses that can arise from cyber risks.
An effective cyber risk governance and management approach includes understanding the connection between an organization's cyber risk management practices and each of these potential types of threats, together with their potential impacts. Deciding to transfer a portion of cyber risk to a third party or self-insuring is an output of that cyber risk management process.
Aside from rigorously reviewing policies, here are the top three actions board members can take to govern the far-reaching economic impacts of their self-insured cyber risk profile:
There are no precedents that will accurately project future losses in cyber risk. Cyber insurance is only one small part of an overall cyber risk management and mitigation strategy. Understanding the entire cyber risk profile in the boardroom requires a deep understanding of the organization’s self-insured cyber risk exposures.
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