EU security agency eyes 'mandatory cyber insurance'

Mandatory insurance to counter unintended effects of harsh data breach notifications.

Europe’s proposed data breach overhaul may merely prompt organisations to limit reputational damage rather than improve security, the European Network and Information Security Agency (ENISA) warns in a new report.

The agency argues for a more fully developed cyber insurance market in Europe that would offer a market-based mechanism to make companies take security more seriously.

The report comes as the EU considers overhauling its data protection laws so organisations that process personal data must report a breach within 24 hours of its discovery.

Breach notification laws may address the lack of information when a breach has occurred, but ENISA warns that without adequate controls, such as “mandatory” cyber insurance, these could cause business to invest in “secondary” losses rather than measures that address the cause of the breach.

“[T]he short time limits proposed may further incentivise the affected firm to consider secondary rather than primary losses,” said ENISA.

“One might further observe that a flourishing market will develop not aimed at remediation of the vulnerability that causes the loss but rather ‘reputational management’ for firms to reduce (if they can choose to disclose) secondary losses.”

Counter measures ENISA proposes include mandatory cyber insurance for vendors that bid for government contracts, robust valuation of the costs of IT breaches, and the ability for European citizens to launch class action claims against companies that suffer a breach.

ENISA points out that Europe’s cyber insurance market remains under-developed compared with the US, and while it does exist within Europe, it is often rolled into more general Commercial General Liability insurance, executives and officers liability or ‘business interruption’ policies.

These do offer some protection, however ENISA points out that US legal disputes show they may fail to account for ‘intangible’ assets where the value of losses must be demonstrated, such as customer data, intellectual property and software, as opposed to the value of physical assets like the loss of hardware.

Key factors that could be stifling the market's development are the lack of actuarial data around cyber risks, buyer uncertainty around what should be insured, and the lack of an 'insurer of last resort' that allows traditional insurance companies to protect themselves against catastrophic incidents.

The potential benefits of cyber specific insurance include tying investments in security to reduced premiums. Cyber specific insurance also has the potential to herd IT security standards such as the ISO 2700x series into underwriting practices, ENISA points out.

The latter benefit would allow security consulting firms to investigate security practices as part of the insurance process, providing insurers with the data they require to price risk accordingly.

Another market incentive for cyber insurance includes pushing vendors to have products certified, allowing the buyer to reduce their insurance premium and sending market signals as to what is effective.

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