The increasing dependence on digital technologies exposes both individuals and business houses to cyber threats. Cyber Insurance is an evolving field. Cyber insurance, once considered as a niche product, has transitioned to an important risk management tool in a highly digitalized world. With the escalation of cyber threats and the deep integration of technology into everyday business operations, organizations—both large and small—are increasingly vulnerable to various cyber incidents in their day-to-day operations. This has made cyber insurance a crucial part of the corporate risk management strategy. While cyber threats and attacks always remain a step ahead compared to cyber insurance products and the industry, where the understanding of these risks are still developing.
Evolving Cyber Threats
Cyber threats are highly dynamic and with the evolution of newer technologies the cyber threats too, evolve. Let us see some of the most emerging cyber risks:
1. Ransomware and Malware Attacks
Ransomware and malware attacks are now some of the most common and harmful types of cybercrime because they create serious financial, operational, and reputational risks for businesses, governments, and individuals.Ransomware is a type of malicious software designed to block access to a computer system or encrypt data until the victim pays a ransom, usually in cryptocurrency. Malware refers to any software designed to disrupt, damage, or gain unauthorized access to computer systems like viruses, spyware and Trojans.
These attacks are happening more frequently and are evolving quickly. With industries becoming more dependent on technology, they have become more exposed to these types of cyber threats, making ransomware and malware top concerns for the cyber insurance market.
A key reason for the rise in ransomware attacks is the development of Ransomware-as-a-Service (RaaS) platforms. These platforms allow even less skilled hackers to easily carry out attacks by purchasing ready-made ransomware tools. Organized cybercriminal groups sell ransomware services to other hackers, taking a portion of the ransom as payment. This has led to a significant increase in both the number and scale of ransomware incidents. Remote working is also said to be one of the reasons spurring the ransomware and malware attacks, as organizations are more exposed because employees access corporate networks from less secure home environments. While the cost of ransomware attacks is continuously registering an increasing trend, the collateral cost from downtime, system recovery and legal costs can also be higher.
2. Cloud Services and its vulnerabilities
As many businesses migrate to cloud platforms and adopt remote work environments, the attack surface expands. Misconfigured cloud services and unsecured remote access points are common targets for attackers. The rise in Distributed Denial of Service (DDoS), where excessive malicious traffic or needless connection requests are used to try and disable the website or web application, is one of the many examples of attacks against cloud infrastructure, which is a growing concern.
3. Artificial Intelligence and Machine Learning Vulnerabilities
AI systems are vulnerable to manipulation. The machine learning algorithms used by the AI systems can be manipulated leading to wrong decisions and compromised data integrity. The best example will be if an autonomous EV vehicle’s system is attacked it may result in accidents giving rise to high financial losses.
4. Data Breaches and Privacy Violations
All businesses collect, process, and store vast amounts of customer data. This becomes the primary target of the hackers. Data breaches lead to financial losses besides causing long-term reputational damage. The Privacy Laws in many countries levy hefty penalties for such breaches making cyber insurance essential to cover these regulatory liabilities. The cyber attackers target the software vendors who often have less robust cybersecurity measures in place. These attacks create a domino effect, as compromising a single vendor can provide access to numerous organizations.
Cyber Insurance Coverage: What Does it Protect?
Cyber Insurance product is designed to provide protection against any financial losses and costs an organization or individual may incur due to any cyber incidents.
First Party Damage (Direct Cost to the Organization)
The cost of recovering lost or corrupted data, including expenses for hiring experts and consultants to restore data after an attack.
Covers business interruption losses due to a cyber-attack resulting in downtime, or suspension of operations
Covers payments to hackers in cases of ransomware or other forms of cyber extortion. Payment ransom always remains an ethical question, but still many policies cover this to enable businesses to get up and running quickly.
In the event of a data breach, businesses are legally required to notify affected individuals. Cyber insurance typically covers these notification expenses, which can be considerable in large-scale breaches.
Some policies cover the cost of hiring crisis management experts to mitigate the reputational damage caused by a cyberattack.
Third-Party Coverage (Liabilities arising from claims against the insured):
Data Breach: If sensitive customer data is compromised, organizations may face lawsuits. Cyber insurance covers legal defense costs and settlements or judgments resulting from these claims.
Cyber insurance also covers fines and penalties imposed by various regulatory bodies protecting the data privacy like GDPR in Europe or CCPA (in California) though this depends on local regulations and the policy terms.
If the cyberattack on the insured’s system has impacted other businesses dealing with the insured like spreading malware, the insurance covers claims for any damages from such third parties.
Covers legal expenses related to defending lawsuits, including attorney fees and court costs.
Challenges In Cyber Insurance – Including Settlement of Losses
With technological developments, cyber insurance has become essential for every organization. But the industry faces significant challenges in risk assessment and underwriting cyber risks.
a. Risk Modelling
Cyber risks are neither predictable nor easily quantifiable, unlike traditional risks such as natural disasters like earthquakes or floods. The cyber risks are evolving rapidly. The lack of historical data, and complex technological environments make it hard for insurers to accurately price coverage.
b. Accumulation of Risks
Since a single cyber incident or attack can affect multiple businesses there is an accumulation of losses arising from different sources like when it involves third-party service providers like cloud platforms.
c. Moral Hazard
The existence of cyber security policy may make the organizations take fewer cybersecurity precautions, which increases their vulnerability. This moral hazard is a concern for insurers, who rely on clients to maintain adequate cyber defenses.
d. Complex nature of policy and wordings
Drafting an unambiguous cyber risk coverage policy remains a challenge due to its inherent complexity and insufficient knowledge, resulting in significant variations between insurers, with many policies including exclusions or limitations for certain types of cyber incidents.
e. Claims Settlement
The complex and evolving nature of cyber risks pose difficulties for the insurance industry when it comes to settling claims. These challenges stem from the fact that cyber incidents are not only unpredictable, but also involve many variables influencing the outcome and cost of an attack. The full scope of damage from a cyberattack is often difficult to assess and to quantify. Beyond the immediate costs, such as ransom payments or data recovery, there are indirect costs like reputational damage, future business loss, and regulatory fines, which can take months or even years to materialize. So, it creates a long tail for the insurers to carry the risks to settle the claims till extinction. The increasing frequency and severity of cyberattacks, especially ransomware, have led to an explosion in claims. The high costs associated with these attacks—such as business interruption, ransom payments, and legal fees—are placing a significant financial burden on insurers. Cyberattacks that target third-party vendors or suppliers can affect multiple insured companies at once, leading to a high volume of claims from a single event. Cyberattacks often result in business interruption, where operations are halted for days or weeks. Calculating the financial loss from downtime is complicated and can lead to disputes between the insurer and the insured.
Settling cyber insurance claims is a complex process fraught with challenges, from ambiguous policy wording to the difficulty of quantifying the full impact of an attack. As the frequency and severity of cyberattacks grows, insurers are grappling with increased claims volume and more complex risks, which may result in higher premiums, more restrictive policies, and delays in settling claims. Both insurers and policyholders need to work closely to ensure clarity in policies and improve cybersecurity measures to reduce the frequency and impact of cyber incidents.
CONCLUSION
Cyber insurance is no longer a niche product—it's a vital part of protecting businesses in today’s digital landscape. However, as cyber risks continue to evolve, the insurance industry faces ongoing challenges in assessing, underwriting, and settling claims. Both insurers and organizations need to work together to ensure clarity in policies, improve cybersecurity defenses, and stay ahead of the ever-changing cyber threat landscape.
Author: CA Chandrasekaran Ramakrishnan, Technical Advisor, Insurance Practice, Insillion
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of IIA and IIA does not assume any responsibility or liability for the same.