Rising Fines Will Push Breach Costs Much Higher

Equifax, $700 million. British Airways, $221 million. Marriott, $120 million. Companies are seeing much heftier fines in 2019, and the near future holds little respite, according to experts.

The pace and amount of fines are predicted to continue and will result in rising costs for companies for any data loss, according to a market forecast published by Juniper Research. The analyst firm predicts that global companies will face $5 trillion in breach costs, recovery fees, and damages in 2024, up from approximately $3 trillion today.

The impact on businesses will be extreme, says James Moar, a lead analyst with the firm.

"It will change the way that smaller businesses operate, as the fines will likely be ruinous and they will be unable to afford insurance to cover the cost of the fines," he says. "Larger businesses will make moves to comply, but so far they have been measures that are required by law or regulation. Where they are not specified, there will be enough room to argue that breaches occurred in spite of strong security measures being in place."

This year has already seen some record-setting fines. Equifax settled with the US Federal Trade Commission to pay up to $700 million for allowing online attackers to access sensitive information in 2017 on more than 148 million people. The UK's Information Commissioner's Office notified British Airways of its intent to fine the company £183 million (approximately US$221 million) under the European Union's General Data Protection Regulation. And the same authority is planning to fine hotelier Marriott £99 million (US$120 million) for the breach of its Starwood Hotels subsidiary.

The fines are putting increasing pressure on companies to get their data security right, says Chris Scott, global remediation lead at IBM.

"As those fines increase, I think you are going to see a lot more board awareness of the need to secure data," he says. "The executives will become much more involved in understanding the security of the information their company retains, and that is a good thing."

Juniper predicts that data breach costs will grow at 11% each year. The Ponemon Institute's "Cost of a Data Breach" report, sponsored by IBM, pegs growth at 12% between 2014 and 2019. Rising fines will likely cause that increasing trend to accelerate, says IBM's Scott.

"You add the fines in there, and I can see that increasing significantly," he says. "I just don't know yet where those fines will play in that process."

In addition, most companies do not take into account the multiyear nature of breach costs, Scott says. Only about half the costs of a data breach are seen in the first year — a third of the costs come in the second year, as companies rearchitect and pay for monitoring and other remediation, and a sixth of the costs come in the third year, he says. Unaccounted-for costs include, for example, paying lawyers to make sure that the company is in compliance with the more than 50 jurisdictions' breach laws, paying for monitoring, forensic analysis, and a variety of steps necessary to fully remediate the risk.

"All of that takes time to implement, and that is where the costs start to extend into the second and third year," he says.

The increasing fines will drive companies to improve their cybersecurity. Because cybersecurity professionals are still in short supply, the main beneficiaries of the higher breach costs will be managed security service providers (MSSPs), especially for smaller businesses, which otherwise run the risk of being driven out of business by one bad breach, Juniper Research's Moar says.

The MSSPs "can manage all elements of cybersecurity and make the patchwork comprehensible for businesses," he says. "There are also promising moves in security awareness training to combat the human element of cybersecurity, which will go a long way to ensuring secure networks."

Not all companies will increase their cybersecurity spending, because the businesses themselves are typically not at risk from data breaches, Juniper's Moar says.

"This element of moral hazard will incline several companies, particularly large ones, to continue to underinvest in cybersecurity unless they are compelled by regulation and compliance that makes cybersecurity a condition of doing business at all," he says, "rather than a cost that can be weighed against the cost of a data breach fine."

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