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Warren Buffet Bets Big on Cyber Insurance as Hacks Increase

Posted on April 05, 2016 by Guy Weismantel

Digital Insurer Blog

With the rise of the Internet's popularity over the last two decades, the worlds of business, healthcare, banks and even governments have fallen prey to poor cyber hygiene, and with it have left consumers vulnerable. In the last eighteen months cyber attacks have broken down the doors of privacy at dozens of health care providers, financial institutions and retailers. Whether you've shopped online, visited your doctor or purchase lumber for a backyard project, your private and personal data has likely been stolen and sold in black markets.

Cyber insurance

The Real Cost of Not Having Cyber Security Insurance

Of the five large healthcare cyber hacks of 2015, health insurer Anthem took the greatest loss. Having lost over 78 million private records, including social security numbers, birth dates and other sensitive information, Anthem is now on the hook for untold sums of capital loss; legal fees, legal settlements and identity theft-repair and credit monitoring for consumers will likely cost upwards of $1 billion

Research from the Ponemon Institute and IBM pegs the cost of cyber hacks to be $154 per record breached. When JP Morgan Chase lost 83 million records in 2014, their total cost, which is still rising from ongoing legal battles, is expected to reach $12 billion.

Cyber insurance

Cyber Attacks Increasing in Prevalence

Further research from the Ponemon Institute evaluated the increasing prevalence of cyber threats and found that cyber hacking has increased three fold since 2010, from an average of 50 successful cyber attacks per week in 2010 up to 160 per week in 2015. The increasing threat to business is large, considering the average cost for all businesses - large and small - to reconcile a hack is $15.4 million.

New Entrants Legitimize Cyber Security Insurance Market

With this increased risk of cyber attacks, more businesses have seen the need for cyber security insurance and savvy insurance firms have stepped in to fill the need. Warren Buffet has been watching the cyber security insurance industry closely and in October of 2015 he invested heavily in the space. Buffet's insurance arm, Berkshire Hathaway Specialty Insurance (BHSI) created two new types of insurance to help businesses of all sizes decrease risk from cyber attacks. The two insurance types provide coverage for cyber liability and breach response. BHSI's entrance into this insurance space is not a menial one either - they've invested heavily in the space and created robust products that are highly customizable. Their offerings include creative customizations options such as errors and omissions liability coverage that can be unique to each buyer.

Warren Buffet

With Buffet's entrance into the market he has signaled to others that there is a lucrative and long-term opportunity in cyber security insurance. Some where surprised when Tom Ridge, previous Secretary of the US Department of Homeland Security, started an insurance company with a direct focus on protecting against the risks of cyber security breaches. Ridge said that people should not be surprised by this new boom in cyber security. Ridge explained that "everyone realizes they are vulnerable – but I think there should be a greater sense of urgency with companies. Our job is to help them with that.” 

Risk Management Necessary for Insurance Providers

Ridge and Buffet both understand that there are increasing risks, but feel that their firm's savvy and background with risk management will allow them to make a long-term business out of insuring for cyber security. As cyber hacking is increasing in prevalence it is important that insurance companies moving into this space pay close attention to their actuarial science and the way they are underwriting policies. For example, the cyber hacking insurance policy has covered most of the few hundred million dollars that health insurer Anthem has had to pay for legal and consultant fees. 

Despite the rising costs associated with cyber security insurance, businesses continue to increase their coverage. Anthem and the hundreds of other businesses that have suffered a security breach in the last few years have been urgently increasing their cyber security coverage.

Insurance Providers Leveraging Increased Demand with New Tools and Offerings

With the growth in this insurance market, insurers are also urgently moving in to meet the demand that has been created. According to a recent study by the consulting firm PwC, the insurance market is set to triple in the next five years - increasing to about $7.5 billion.

As insurance providers open up new offerings to leverage this demand and capture a piece of that $7.5 billion pie they are also turning to new technology and tools to help them scale into the new market. Whether these providers are offering the new cyber security coverage or not, they continue to see how important embracing technology is to remain competitive and better manage risks. Not only is embracing new technology keeping these insurance agencies and providers relevant in the changing markets, it also keeping their sensitive data safe as new agency software providers have been working extensively at increasing the security of their software.

Guy Weismantel

Mr. Weismantel is the Vice President of Marketing at Vertafore. With 20 years of marketing and financial leadership in companies such as Microsoft, Business Objects, Baxter HealthCare, Caremark International, and Expedia, Guy’s career has focused on bringing differentiated products to market and providing the “compelling reason to purchase” for customers and prospects alike.

Guy has a Bachelors Degree in Accounting from the University of Notre Dame, and a Masters Degree in Business Administration from the Kellogg School of Management at Northwestern University.




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