insurance protection gap

In today's interconnected digital world, cyber risks loom large, threatening businesses of all sizes and industries. However, there exists a significant gap between the evolving landscape of cyber threats and the adequacy of insurance solutions to mitigate these risks. This article delves into the current cyber risk landscape, highlighting the growing challenges faced by businesses. It then investigates the gap in cyber risk protection and analyses the insurance solutions emerging to bridge this gap, ensuring thorough coverage and resilience against evolving cyber threats.

This article explores the present cyber risk environment, emphasizing the increasing difficulties encountered by businesses. It then investigates the expanding disparity in cyber risk protection and analyzes the creative insurance solutions that are emerging to close this gap, guaranteeing thorough coverage and resilience against evolving cyber threats.

I. Understanding the Current Cyber Risk Landscape:

If we dive into the challenges that companies are facing, the ones that keep CEO’s up at night, according to the Allianz Risk Barometer, cyber risks are a top priority across all company size: small , mid-size and large companies.

The digital revolution has brought great opportunities for businesses to innovate and expand their operations. However, along with these opportunities come significant cybersecurity challenges. Cyber threats have evolved in complexity and scale, with malicious actors employing sophisticated tactics to infiltrate networks, steal sensitive data, and disrupt operations. From ransomware attacks to data breaches and supply chain vulnerabilities, businesses face a variety of cyber risks that can have far-reaching consequences, including financial loss, reputational damage, and regulatory fines.


In 2023, ransomware claims activity surged by over 50% compared to the previous year, driven largely by the emergence of Ransomware as a Service (RaaS). The creators of RaaS make their malicious software available on the dark web, enabling individuals without advanced technical skills to launch ransomware attacks in exchange for a percentage of the ransom payments collected.

The cost and complexity of incidents are on the rise, as many ransomware attacks now involve not only data encryption but also the theft of personal and sensitive data for the purpose of extortion, a tactic known as "double and triple extortion." In triple extortion attacks, criminals threaten to harm the victim's relationships with business partners, customers, or affiliated entities.

Data breaches represent the most concerning cyber exposure. Analysis of significant cyber losses indicates a significant increase in cases involving data exfiltration. Allianz Commercial claims analysis reveals that breaches not detected and contained early can be 1,000 times more expensive. Furthermore, ransomware attackers are increasingly targeting critical infrastructure, such as power grids and hospitals, raising concerns about potential widespread disruptions.

Artificial intelligence (AI) is expected to play a significant role in future ransomware attacks. AI-powered language models have been incorporated into the arsenal of cybercriminals, enabling automated attack processes, more convincing phishing, and faster malware development. However, AI could also enhance cybersecurity, leading to more effective and faster detection and threat intelligence.

Moreover, there is a talent shortage in cybersecurity, making it challenging for businesses to find qualified professionals to defend their systems.

SME’s : an increasing sweet spot for cyber criminals

While large companies have been beefing up their cybersecurity in recent years, cybercriminals are increasingly targeting smaller businesses.

For small and medium-sized businesses (SMEs), the risk of cyber threats has risen due to the impact of the Covid-19 pandemic, the transition to remote work, and digitalization. Additionally, SMEs are increasingly reliant on outsourcing for services such as managed IT and cybersecurity. This is especially true as these businesses often lack the financial resources and in-house expertise that larger organizations possess.

SMEs may encounter challenges in recovering from the business disruptions caused by a cyberattack. A small company with weak controls or inadequate risk management may struggle to survive in the aftermath of a significant cyber incident.

II. Addressing the Cyber Risk Protection Gap:

Despite the growing awareness of cyber threats, there exists a significant gap between the potential impact of cyber incidents and the level of insurance coverage available to businesses. Traditional insurance policies often fall short in adequately addressing the evolving nature of cyber risks, leaving businesses vulnerable to financial losses and operational disruptions.

Several factors contribute to this gap:

  • Underestimation of cyber risks: Many businesses, particularly smaller ones, may downplay the potential impact of cyber incidents on their operations. This underestimation often leads to insufficient insurance coverage, leaving them exposed to significant financial losses
  • Lack of cyber risk awareness: This issue stems from a limited understanding of the diverse cyber risks faced by businesses. Insufficient awareness of potential threats can lead to inadequate risk assessments and management practices, further widening the protection gap
  • Rapidly evolving cyber threats: Cyber threats are continuously evolving, with new attack vectors emerging regularly. Insurance policies may struggle to keep pace with these changes, potentially leaving gaps in coverage for emerging cyber risks not accounted for in policy designs.
  • Complexity of Cyber Incidents: The rise in mass ransomware attacks highlights the need for insurers to better understand the interconnectivity and dependencies within digital supply chains. The claims process for cyber insurance can be complicated and involve various stakeholders, adding to the complexity of addressing cyber incidents.
  • Limited historical data: Unlike traditional insurance lines, cyber insurance lacks extensive historical data for accurate actuarial analysis. The absence of sufficient data on the frequency and severity of cyber incidents makes it challenging to develop precise insurance models, contributing to the cautious approach towards cyber risks.
  • Difficulty of quantifying risk: Traditional methods of risk measurement often fall short due to a lack of contextual data, making it challenging to quantify cyber risk accurately.

Addressing these challenges requires a concerted effort from insurers, businesses, and other stakeholders to enhance cyber risk awareness, improve risk assessment and management practices, and develop innovative insurance solutions that adapt to the evolving cyber threat landscape. Closing the protection gap demands a proactive approach towards understanding, mitigating, and transferring cyber risks in today's digital age.

III. Emerging Insurance Solutions to Close the Gap

In response to these challenges, the insurance industry is witnessing a paradigm shift towards innovative cyber insurance solutions tailored to the unique needs of businesses operating in today's digital environment. Cyber insurance policies now offer comprehensive coverage for a wide range of cyber risks, including first-party losses such as business interruption, data breach response costs, and third-party liabilities arising from privacy violations or regulatory fines.

Tailored Coverage

Tailored coverage is key:  the specific cyber threats faced by a company depend on its industry, the nature of its operations, and the type of sensitive information it handles. Variances in operations and data handling mean that a manufacturing company and a law firm encounter distinct cyber risks.

For instance, a manufacturing company may face threats targeting industrial control systems, necessitating robust business interruption coverage to mitigate potential disruptions. Conversely, a law firm is more susceptible to risks associated with maintaining confidentiality and safeguarding sensitive legal information.

To adequately safeguard against these divergent threats, tailored insurance coverage aligned with the specific risks of each business is essential. This ensures that companies have precisely the right protection in place to address their unique cyber risk exposures.

Risk assessment
The insurance industry will support businesses with risk assessment and management, aiding them in identifying and comprehending their cyber risks. This, in turn, empowers organizations to implement proactive measures to mitigate potential threats.

Incident response

Insurers play a crucial role in providing incident response assistance to businesses affected by cyber incidents. They collaborate with forensic experts and legal firms to navigate the aftermath, offering expertise, resources, and financial support for a swift recovery. This assistance is vital in minimizing downtime and mitigating the overall impact of the incident.

Financial protection

Cyber insurance serves as a form of financial protection by covering the expenses associated with cyber incidents. These costs, which can be substantial, include data breach notification, legal defence, and restoration of affected systems. Having sufficient financial support enables businesses to manage the repercussions of a cyber incident without enduring severe financial setbacks.

Continuous coverage adaption

As cyber threats evolve, insurance solutions adapt to cover emerging risks. Insurers remain vigilant of the evolving cyber landscape and update policies accordingly to address new threats and vulnerabilities. This ensures that businesses maintain relevant and effective coverage against the latest cyber risks.

Education and training initiatives

Additionally, some insurers offer educational resources and training initiatives to empower organizations with knowledge and skills in managing cyber risks effectively. By investing in education and training, insurers contribute to closing the gap in understanding and combating cyber threats within businesses.

IV. Insurance solutions from an insurer’s perspective

Insurers employ several strategies to spread the risk and manage the financial impact of cyber losses effectively:

Diversification of Portfolios: Insurers underwrite policies for a diverse range of businesses and industries, spreading their risk across various sectors. This diversification strategy helps mitigate concentration risk, ensuring that potential losses are not overly concentrated in any specific industry. A balanced portfolio reduces the overall impact of a catastrophic event on an insurer's financial stability.

Setting Policy Limits and Deductibles: Insurers carefully assess and set policy limits and deductibles based on the unique risk profiles of their policyholders. By establishing appropriate limits and sub-limits, insurers control their potential exposure to losses while ensuring that clients are provided with adequate coverage. Deductibles also help in sharing the financial burden of smaller incidents with policyholders.

Co-insurance Strategy for Specific Risks: With the increasing prevalence of ransomware incidents, many insurers have implemented co-insurance strategies to limit losses. For example, a client may be responsible for a certain percentage of ransomware-related losses, such as 30%. This strategy strongly incentivizes the insured to improve their risk management practices and quality.

Risk Pooling and Reinsurance: Insurers utilize risk pooling and reinsurance mechanisms to spread the financial impact of cyber events across a broader spectrum of entities. Risk pooling involves companies paying premiums to an insurance pool, which assumes the financial responsibility for covered losses (mutual insurance). Reinsurance allows insurers to transfer a portion of their risk to other insurance companies or reinsurers. By creating a network of shared risk, insurers collectively manage the financial implications of catastrophic cyber incidents.

V. Conclusion

In conclusion, the gap between cyber risks and insurance solutions presents a significant challenge for businesses seeking to protect themselves against the growing threat of cyber attacks. However, by embracing innovative insurance solutions and adopting a proactive approach to cybersecurity risk management, businesses can enhance their resilience and mitigate the financial and operational impacts of cyber incidents in an increasingly digital world.

Auteurs

03 BFWD 2024 5 Foto Elisabeth Van Rompay

Elisabeth Van Rompay

Senior Underwriter Financial Lines, Allianz