Cyber Insurance: Coverage, Costs, and Why You Can't Afford to Skip It!

All You Need to Know

What is Cyber Insurance?

Cyber insurance is a mechanism that can help protect your business against losses resulting from a cyber attack. It helps companies manage financial risks associated with cyber incidents.

Just like car insurance which covers bodily harm and car damages, cyber insurance covers costs related to damaged computer systems, lost revenue, legal expenses, and other costs associated with cyber attacks.

In the US, only 50% of companies have cyber insurance. According to Verizon, 72 percent of data breaches targeted large companies as of 2020. The remaining 28 percent affected small businesses.

Cyber insurance is also known as cyber liability insurance, cyber security insurance, cyber risk insurance, and cyber coverage insurance.

Most observers trace the start or the history of cyber insurance back to the spring of 1997 when Steven Chase helped AIG write the first internet security liability policy.

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What is the Coverage of Cyber Insurance?

Cyber insurance coverage varies from policy to policy, but it generally covers the costs involved with recovery after a cyber-related security breach or similar event.

Here are areas covered by cyber insurance.

Ransomware Demands. These constitute the demands of the ransomware attackers such as ransom or cyber extortion demands.
Network Security Liability. The coverage may include protection of your business in the event of network security failure which can include data breach, malware infection, or business email compromise.
Response Costs. Costs related to data recovery and restoration, public relation expertise, and all those related to the protection of company’s digital properties. This includes setting up a call center to notify customers, monitoring of affected customers, brand identity restoration, and costs related to privacy management.
Costs of Investigation: A forensic investigation is often necessary to determine what occurred, how to repair the damage, and how to prevent the same breach from occurring again. This may involve third-party services, lawyers, and law-enforcement bodies.
Costs of business disruptions. These are indirect costs or extra expenses may be incurred when the business need to operate out in temporary locations.
Legal Fees. These are costs related to legal representation and advice, including compliance with relevant laws and regulatory requirements, and defense against lawsuits related to the breach.

What specific property does cyber insurance cover?

Cyber insurance does not cover properties in the traditional sense of the word. However, it covers specific properties that are vulnerable to cyberattacks and data breaches such as:

Damaged hardware: Cyber attacks may render hardware useless or destroy machines. In some instances, these cause the need for replacement. Some cyber insurance policies may cover these types of properties.
Intellectual properties or IPs: Also called “creations of the mind.” These include inventions, artistic works, trademarks, and copyrights. Source codes, for example, are valuable IPs subjected to various cyber-attacks. The Electronic Arts (EA) cyber attack is a notable case where hackers broke into the systems and stole their source code.

What are not covered by cyber insurance?

Cyber insurance policies typically do not cover the following:

Cyber damages due to war or terrorism. Any loss caused by war or terrorism is generally not covered, but some cyber insurers cover damages arising from cyber terrorism.
Third-party damages. Damages arising from a breach of your supplier or vendor’s operating systems resulting in ramifications to your business are unlikely to be covered by cyber insurance.
Maintenance failures. Before approving claims, cyber insurers will investigate if minimum security standards were observed.
Lost or stolen devices. Cyber insurers do not cover lost or stolen portable electronic devices.

What is liability coverage insurance?

Cyber liability coverage, also called third-party coverage, is a feature or type of coverage that protects against claims resulting from injuries and damage to other persons or property.

It covers damage impacting your customers or business partners because of a cyber attack. These damages include legal fees, customer notifications, and settlement costs.

For example, if cyber hackers breach a company’s computer system and steal sensitive customer information such as credit card numbers, health records, and Social Security numbers, liability coverage will indemnify the costs associated with the breach.

Any business that stores sensitive data in the cloud or in electronic devices should have cyber liability insurance.

Why get cyber insurance?

The importance of cyber insurance is premised on the following realities:

A recent study shows that 66% of chief decision-makers at small and medium businesses (SMBs) believe that they are unlikely to be targeted by cybercriminals. Another research shows that 61% are not bothered that they will be a victim of a cyber attack in the next 12 months.

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Financial protection. Cyber insurance can help you recover from financial losses resulting from cyber attacks or data breaches. These financial losses include investigation costs, crisis communication, refunds, and legal fees.

Strengthen your Business reputation. Cyber insurance increases confidence in your customers and partners. It gives them the peace of mind that dealing with you has an additional layer of protection.

Improved IT security. Getting a cyber insurance policy enables a company to go through a list of compliance requirements that increase its defenses against threats. These steps could improve and redefine security standards. Improved IT security leads to financial benefits such as lower insurance premiums.

How much cyber insurance do I need?

Calculating the needs for cyber insurance involves several steps:

Assess the Risk: Understand the type of information at risk, how the information is stored, who has access to it, and how it is segregated from other systems. This will help you understand the potential impact of a data breach on your business.
Understand the Costs: The average cost of a data breach is about $3.86 million. Understanding these costs can help you determine the amount of coverage you need.
Consider the Type of Data: The limits you need to purchase will depend on the number of sensitive records you store, the type of the data, and other tools you use to minimize the fallout from the data breach.
Industry Considerations: Your industry and the customer information you store determine how much cyber liability coverage you need. For high-risk businesses like those dealing with health information, purchasing a cyber liability policy with a specific coverage limits may be a smart option.
Benchmarking: Many rely on benchmarking, but you must understand its limitations. Benchmarking is populated with historical purchasing data and the cyber market is relatively young. Minimal amounts of quality data in a dynamic area of risk can lead to buying unsuitable limits.
Consult with Experts: Insurance brokers and cybersecurity experts can provide valuable advice on how much coverage you need based on your specific business risks. By consulting with experts, you can lower your risk assessments which will ultimately lead to a reduction of your cyber insurance premiums.

Reduce your costs for premiums

By consulting with experts, you can be able to reduce your cyber insurance costs such as through the following methods:

Penetration tests
Strong security policies
Documentation proofs

Get expert advise on how to reduce your cyber insurance premiums.

How does cyber insurance work?

The working process of cyber insurance is similar to other cyber insurance forms. Here are the essential principles for insurance to work:

Risk-sharing: Insurance pools funds together from the members in preparation for the predefined uncertain cyber event.
Law of probability: It uses formulas to determine the likelihood of a breach in a certain company.
Spreading losses: It spreads these losses over a large number of companies that share the same exposure to the same risk.
Risk selection: Cyber insurers use a systemic evaluation of applicants to determine the level of risk profiles, possible coverage, and premiums.
Policy reserve: Before insurers can sell their products to the public, laws require them to accumulate funds giving them the liquidity to comply with obligations in case of claims.
Law of large numbers: Cyber insurers use this fundamental concept of statistics to estimate the value and frequency of future claims they will pay to policyholders.

What to Look for in a Cyber Insurance Product?

Coverage worth considering
Basic coverage
First-party coverage
Third-party coverage

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