Digital connectivity continues apace – but brings with it increased cyber risks. These relatively new and complex risk profiles require approaches that go far beyond traditional insurance.
approx. 5 minutes
Self-learning machines, cloud computing, digital ecosystems: in the steadily expanding Internet of Things, all objects communicate with others. In 2017, 27 billion devices around the world were online, but this number is set to increase five-fold to 125 billion by the year 20301. Many industries are profiting from the connectivity megatrend.
In virtually every sector, automated processes are delivering greater efficiency and therefore higher productivity. By analysing a wide range of data, businesses also hope to gain new insights into existing and prospective customers, their purchasing behaviour, or the risk that they might represent. This will facilitate a more targeted customer approach. At the same time, greater levels of interconnection are leading to new business models. Examples include successful sharing concepts and online platforms.
Growing risk of ransomware
But just as there are benefits to growing connectivity, there are also risks. Ensuring data security at all times is a serious challenge in this complex world. When setting up and developing digital infrastructure, companies must constantly invest in data-security expertise and in technical security systems, not least to protect themselves against cyber attacks. This became clear in 2017 at the latest, when the WannaCry and NotPetya malware attacks caused business interruption and production stoppages around the world. The costs of WannaCry in the form of lost data and business interruption were many times greater than the losses from ransom demands. With other attacks, the objective was not even extortion – but rather to sabotage business operations or destroy data. Phishing, which is the attempted capture of sensitive personal and log-in data, and distributed denial of service (DDoS) attacks, which take down entire servers by systematically overloading them, also cause billions of dollars in damage each year. It is difficult to calculate the exact amounts involved, but business losses from cyber attacks are currently estimated at between US$ 400bn and US$ 1tn each year. The number of cyber attacks continues to rise – as do the resulting losses. According to estimates from market research institute Cybersecurity Ventures, companies around the world will fall victim to such attacks every 14 seconds on average in 20192.Europol also notes that there have been attacks on critical national infrastructures in the past, in which people could have died had the attacks succeeded.
Increasing demand for cyber covers from SMEs as well
As the risks increase, so too does the number of companies that attach importance to effective prevention measures and that seek insurance cover. The pressure to improve data protection has also increased as a result of legal requirements such as the EU’s General Data Protection Regulation, which came into force in May 2018 and provides for severe penalties in the event of violations. In a world of digital dependency, automated processes, and networked supply chains, small and medium-sized companies in particular realise that it is no longer enough to focus on IT security within their own four walls.
For the insurance industry, cyber policies are gradually becoming an important field of business in their own right. According to estimates, further significant increases in premium volume are on their way. In 2017, premium volume was at between US$ 3.5bn and US$ 4.0bn. This figure is expected to increase to between US$ 8.0bn and US$ 9.0bn by the year 2020. So there will be good growth opportunities over the next few years, particularly in Europe.
Cyber risks difficult to assess
Cyber risks pose unique challenges for the insurance industry, above all in connection with accumulation risk: a single cyber event can impact many different companies at the same time, as well as leading to business interruption at yet more companies.
How can the market opportunities be exploited, while at the same time managing the new risks? Are cyber risks ultimately uninsurable, as many industry representatives maintain? One thing is certain: there are a number of extreme risks that the insurance industry cannot bear alone. At present, these include network outages that interrupt the electricity supply, or internet and telecommunication connections. Scenarios like these, and the costs that come with them, should be borne jointly by governments and companies, for example in the form of pool solutions.
Cyber as a new type of risk
There are key differences between cyber risks and traditional risks. Historical data such as that applied to calculate future natural hazards, for example, cannot tell us much about future cyber events. Data from more than ten years ago, when there was no such thing as cloud computing and smartphones had not yet taken off, are of little use when assessing risks from today’s technologies. Insurers and reinsurers must be able to recognise and model the constantly evolving risks over the course of these rapid advances in technology. An approach that relies on insurance expertise alone will rapidly reach its limits. Instead, the objective of all participants should be to create as much transparency as possible as regards cyber risks. IT specialists, authorities, and the scientific and research communities can all help to raise awareness of the risks and contribute their expertise for the development of appropriate cyber covers.
Working together to enhance security
Munich Re relies on collaboration with technology companies and IT security providers to develop solutions for cyber risks. This is because the requirements for comprehensive protection are complex, and safeguarding against financial losses is only one component of an overall concept. Accordingly, in consultation with our technology partners, we are developing highly effective, automated prevention services for our clients. These are designed to permanently monitor the client infrastructure, identify risks promptly, and prevent losses. And – importantly – a company needs to respond quickly to limit the loss from an event and allow it to resume normal operations without delay. In this context, we assist our clients with a network of experts.
But cyber risks remain a challenge, and one that the insurance industry needs to tackle. Insurers can only remain relevant for their clients if they constantly adapt their offerings to new or changed risks and requirements. Opportunities for new fields of business are arising.
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