Mandatory breach reporting creates cyber-insurance imperative: Marsh

The looming introduction of mandatory data-breach laws will force many Australian companies to buy ‘cyber liability’ insurance policies to cover breach-related damage that’s not covered under existing business insurance policies, an insurance-industry specialist has warned.

Speaking to CSO Australia ahead of an industry forum to discuss the escalating cyber risk facing Australian companies, Craig Claughton, NSW manager for FINPRO with business-interruption firm Marsh Australia, said many companies remained unaware that their existing policies would not cover damage or loss arising from cyber-attacks.

“Traditional property and professional indemnity policies do certain things, and most of these will not relate to cyber-attacks principally because they’re used to damage being done by physical means. There’s a gaping hole around cyber exposure.”

That hole has been filled for several years by specialist cyber liability products, with UK and Australian underwriters already offering around $150m worth of UK and Australian-sourced funding for domestic cyber-security policies. That is expected to increase dramatically if mandatory breach-notification legislation is introduced, at which point Claughton anticipates a market rush as businesses race to catch up.

Exactly what comprises a cyber-security policy, however, is still being figured out. Insurers typically offer “quite reasonable” premiums and are vetting customers with “pretty limited questions” that reflect the nascent state of the market, said Claughton, adding that premiums may well increase as mandatory breach notification paints a better picture of the real (and often unstated) security risk facing Australian companies.

“It’s like any insurance policy,” he explains. “Insurers need to have data, then they can chart what they expect the premiums to be. Insurers are still learning about this risk as well, and at the moment I think they don’t know how to price it; they don’t yet know what they don’t know.”

Policies aren’t simple set-and-forget affairs, however: although customers need to demonstrate basic protection measures such as antivirus software, use of encryption and compliance with standards such as PCI DSS payment-card security.

The policies also cover a specific set of potential circumstances, including business interruption and cyber extortion, but will not typically cover reputational damage that occurs because of a breach.

Insuring against risk requires companies to appreciate the full extent of their vulnerability to security breaches – which in itself requires a level of planning and consideration that many companies still have yet to undergo. Mandatory breach legislation would, however, force their hand, says Claughton – pushing small businesses, in particular, to quickly catch up.

“Many of our largest clients have already self-identified cyber security and the risks related to that, both in terms of compliance with the law and the downside to having a breach,” he explained.

“They tell us it’s one of the highest levels of operational risk. But even a small business can have a lot of clients, and if this law changes and they do have a data breach, they will have this compulsory requirement.”

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