Essay Example on Cyber Loss: Essential Management Tool for Insurers

Introduction

Cyber loss can be both physical and digital in the sense of business interruption, physical damage, personal information theft, liability (issues of the network from loss of data to the limited access of network services), reputational harm and digital assets such as financial data and personal data. Therefore, the control of cyber risks is a significant role of the management toolsets since insurers need not only a big range of capabilities but also that which can be established in the house. The motive behind the establishment of partnerships with outside parties owning particular skills is an expected growing trend whose major component is the cyber events management. The assimilation of cyber knowledge to achieve a deeper comprehension of the forces and signs of risks to quantify and identify risk factors to structure properly and price products of cyber insurance are what convey the understanding of cyber insurance risk. However, risk prevention can increase implementation and awareness of risks remedies that range from regular incentives to premium discounts such as antivirus software download to complete set of risk prevention program including assessment of cyber risks, security software, advisory services, hardware solutions, compliance facilities, and personnel training. The encouragement of global security information expenditure rose by 7.9% to 81.6 billion dollars in the year 2016, unlike extensive spending witnessed in the year 2015 across the globe (Aon 2016). Cyber risks will surround the topics of upcoming risks, with companies grappling with their mitigation and causes. A common feature with these risks is that they can originate from an individual working from a foreign state and could endanger the whole operations of world organizations. The large traditional insurers have therefore issued several insurances. At the same time, others are beginning to realize the opportunity as well as majoring in areas they seem to be abreast of even though many are quite suspicious. Additionally, cyber risks are a threat to small businesses too. Still, the only distinction is on the devastating impact though the total estimation is only fifteen percent of the minor companies with cyber insurance coverage. According to AIG, Cyber insurance standalone most prodigious writer (2016), he would make more cyber coverage to 2018 commercial insurance casualty, that is, moving away from policy issuance that does not distinguish whether or not losses from cyber risks are covered. AIG says;

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"When you buy affirmative cyber coverage, you should be paying for it." ( AIG 2017)

The transformation of business and digitalization of the global economy has intrinsically increased with the rise of cyber risks. At the same time, there is an expansion of technology the scope of opportunities above the geographical limits that transformed and marked how companies conduct businesses with massive technology that grants opportunities for &vulnerabilities. Following the mandate of the European Insurance and Occupational Pensions Authority (EIOPA) to protect financial stability, it has been undertaking several steps to supervise cyber risks in the area of the sector of insurance. This particular report focuses on promoting the understanding of European insurance sector vulnerabilities towards the dangers in addition to the problems encompassing cyber insurers within the European cyber insurance market. The report will also provide a general overview of cyber risks as a combination of the insurers' risk profile from the perspective of the operational risk and the opportunities and challenges for the market of European cyber. Therefore, this report profiles the EIOPA report that is, "Understanding Cyber Insurance - A Structured Dialogue with Insurance Groups," published in August 2018 (AIG 2017). The report consists of five sections an introduction, literature review, development of a practical framework for underwriting cyber insurance with physical property damage, analysis of data and interpretation of results, and the last part, a conclusion with logical arguments and the achievement of research objectives.

Part2: LITERATURE REVIEW

In the year 2018 August, the EIOPA compiled the report, "Understanding Cyber Insurance - A Structured Dialogue with Insurance Groups," and the main finding was the urge for a profound understanding of the cyber risk poses the big challenge for the industry of European cyber insurance. From the results and with the mandate of IOPA to protect financial stability, this report focuses on an extensive understanding of cyber risk for the sector of insurance. In contrast, the initial release majored on a qualitative survey with only cyber underwriting. This particular report encompasses both cyber underwriting activities and the challenges of cybersecurity of insurers. The threats of cyber have become more rampant in recent years and are gradually considered a significant global risk for the economic sector and the financial industry as a whole. The frequently sophisticated cyber-attacks, increased usage of massive data, rapid digital transformation, and cloud computing make the insurers vulnerable to cyber threats - insurance groups as well as posse substantial amounts of valid information of policyholders. Additionally, the advanced technology and digital economy also grant opportunities to underwriters of cyber. An adequately established market for cyber insurance can play a significant role in the digital economic transformation through increased awareness on cyber risks, knowledge sharing on the management of cyber risk activities, and the facilitation of responses to and recovery from cyber threats and attacks (Merler 2017).

Generally, this report offers new information concerning cyber risk in the sector of European insurance, both from an underwriting perspective and operational risk management drawing from the forty-one large groups of coverage all over the European countries that represent about 75% of the total assets consolidated. The findings show the urge for a rational framework of cyber resilience for insurers as well as the difficulties experienced by the underwriters of cyber. The critical conclusion points can be summed up as the market for cyber insurance and as an element of operational risk of the profile of the insurer. Comprehensive, transparent and universal need of cybersecurity governance inclusive of operational resilience could ensure safe provision of the services of insurance such as continuous set of definitions and terminologies on cyber risks to allow a more focused and structured dialogue between the supervisors, industry, and policymakers that could extensively improve the cyber resilience within the sector of insurance. The evident cyber incidents bewildering insurers are malware infections, phishing mail, denial of services attack, and the exfiltration of data and the consequences suffered from these incidents are material costs for holders of policy and the third party and business interruption. Overall, the outcomes show that the industry is conscious of the possible cyber threats and has included cyber risk, especially in their frameworks of risk management. More actions to support the determination of the insurance sector against the vulnerabilities of cyber is vital, considering the changing nature of threats of cyber. This action would entail shaping the cyber reporting frameworks in the financial sector and insurance sector to prevent inconsistencies in the information reported and to improve operational resilience. Even though the market for cyber insurance is still small, the cyber insurance for European is developing at a rapid rate with an increase of seventy-two percent in the year 2018 in proportions written premiums for gross insurers amounting to 299 million euros compared to 172 million euros in the year 2017(Merler 2017). The increased rate of cyber-attacks, regulation changes, as well as the continued development of technology is expected to catapult the demand for insurance of cyber in the future. While non-affirmative exposures of cyber remains a significant concern as efforts to address and access non-affirmative risks from cyber is in process. Still, the lack of explicit cyber exclusions, action plans, and qualitative approaches to address these exposures indicates that insurers are of late wholly aware of the possible exposures to cyber risk. However, some groups have assumed a 'wait and see' approach to handle non-affirmative risks of cyber where the action plans implemented to control non-affirmative exposure relies on the materializing the future events. This method can be problematic since insurers might suffer huge unforeseen losses in traditional policies, especially if an incident of cyber materializes. It is also vital for the industry to enhance its data collection and assessments to measure, monitor, and manage cyber risks adequately. Most importantly, having harmonized and common standards for cyber measurement and reporting purposes can highly boost the understanding of the underwriting of cyber risk. Hence, the creation of an extensive European cyber incident database reporting from a unified taxonomy could as well be taken into consideration (Merler 2017).

Part3: DEVELOPMENT OF A PRACTICAL FRAMEWORKFOR UNDERWRITING CYBER INSURANCE WITH PHYSICAL PROPERTY DAMAGE

This section provides a comprehensive view of the significant aspects of cyber insurance of the European underwriting market from both qualitative perspectives and quantitative perspectives. It systematically consists of a short description of the cyber insurance case study relevant to its objectives, a practical underwriting model drawn from the case study activities and a brief description of the main features, and a short comparison of this realistic model in conjunction with theoretical model discussed in the literature review.

Generally, the provision of affirmative cyber insurance is given as standalone products that are mainly designed to deal with cyber risks or as a backup coverage to transitional business lines called cyber endorsements, and it covers the liabilities of both third party and first party. As was earlier described in part two of this report, a total of twenty groups of insurance involved in the sample gives some affirmative cyber insurance that constitutes 51% of the total sample (Eling and Scheneli 2016). However, the majority group, that is, twelve groups of insurance, provides both cyber endorsements and standalone, while six groups only offer two cyber approvals, as seen in the figure below.

The majority of the cyber insurance groups offer a relatively wide range of coverage of cyber insurance, among them being cyber theft and restoration of data is presented in table one below. Cyber extortion, penalties, administrative investigation, network interruption, extra expenses, and first responses are typical exams of less provided coverage. The European cyber insurance is rapidly growing and averagely increased by 71% in the year 2018 in gross written premium for the sample groups. The total gross written premium constituted approximately 295 million euros in the year 2018 compared to the year 2017 when it estimated 172 million euros (Merler 2017). These estimates are close to the cyber market of Europe, which accounts for 0.002% of the whole gross written premiums in the year 2017 of the groups taking part in the exercise (Marrota et al. 2017).

Moreover, several premiums are often written for products of standalone that are five times bigger than for cyber endorsements in approximation. The increasing trend in cyber insurance is both as a result of genera...