In a recent letter to insurers, the New York State Department of Financial Services (“NYDFS”) acknowledged the key role cyber insurance plays in managing and reducing cyber risk – while also warning insurers that they could be writing policies that have the “perverse effect of increasing cyber risk.” If a cyber insurance policy does not incentivize the insured to maintain a robust cyber security program, the insurer can end up bearing excessive risk when the customer leans on the policy as their business continuity plan.
You may be wondering “What does this have to do with my business? I don’t do any business in NY state.” However, your insurer might be subject to the NYDFS cybersecurity regulation (23 NYCRR 500) and, if so, likely received this letter.
According to NYDFS, every cyber insurer should have a formal strategy that incentivizes their insureds – through more appropriately priced plans – to “create a financial incentive to fill [cybersecurity] gaps to reduce premiums.” Below is our take on five of the key practices outlined in the NYDFS letter that have potential implications for insureds.
- Manage and Eliminate Exposure to Silent Cyber Insurance Risk. Up to now, many organizations have leveraged clauses in standard policies to cover ransomware attacks, such as those covering general liability, theft, malpractice and errors. NYDFS advises that “insurers should eliminate silent risk by making clear in any policy that could be subject to a cyber claim whether that policy provides or excludes coverage for cyber-related losses.” When you next renew your policy, read the fine print carefully to determine if there are any exemptions for cyber-related losses – even if you have a standalone cyber insurance policy. An insurer that was left ‘holding the bag’ for covering a ransomware attack under a policy that wasn’t priced to cover cyber losses is incentivized to update that policy language at the soonest opportunity.
- Evaluate Systemic Risk. Here, insurers are being advised to “stress test” their coverage to ensure they would remain solvent while covering potentially “catastrophic” cyber events impacting multiple insureds. If you are a cloud or managed services provider and/or are part of other organizations’ supply chains, you should expect to receive more scrutiny from your insurer on the strength of your cyber security program.
- Rigorously Measure Insured Risk. No surprises here, unless you haven’t been filling out detailed questionnaires about your cyber security program. Expect more scrutiny of your program, and possibly the involvement of auditors to validate your claims. Check your insurance policy to see if investing in a certification program – such as ISO 27001 or HITRUST – might improve your policy premium.
- Educate Insureds and Insurance Providers. This practice states that “insurers should also incentivize the adoption of better cybersecurity measures by pricing policies based on the effectiveness of each insured’s cybersecurity program.” Take advantage of any educational opportunities your provider offers on cybersecurity best practices and improvements. They might be trying to tell you how you can lower risk – and your rates.
- Require Notice to Law Enforcement. While this is a best practice, NYDFS is recommending this be more formally required in the policy language. Involving law enforcement is important when responding to cyber incidents, especially when it comes to investigating the incident and attempting to recover funds. Make sure you involve legal counsel and have a plan for engaging law enforcement in the event of a breach.
Even if your insurer hasn’t received this guidance, they are certainly aware that cyber risk, and the cost of underwriting cyber insurance, continue to increase. With the cyber insurance market estimated to exceed $20 billion by 2025, and the risk that intermediaries – including insurers – can be liable for ransom payments made to entities sanctioned by the Office of Foreign Assets Control, business leaders should expect that their insurers will be more closely scrutinizing their cyber security plans and controls. Rebuilding encrypted systems and restoring from backup, as opposed to paying ransoms, will need to be the first plan of action.
If your organization is still struggling with the decision whether to invest more in IT security and architecture improvements or continue to rely on insurance as your cyber security plan, the guidance in the NYDFS Cyber Insurance Risk Framework merits a closer look.
While cyber insurance can be essential to helping your organization recover from a data breach, it should not take the place of a strong cyber security program. At minimum your cyber security program should include a Cyber Security Plan, Business Continuity and Disaster Recovery Plan and an Incident Response Plan. These plans should be tested, reviewed and updated at least annually, preferably in conjunction with a penetration test and vulnerability assessment from a qualified third party.