Should SMBs Invest In Cyber Risk Insurance?

During the summer of 2009, online thieves used a compromised computer at Mountain View, Calif., demolition firm Ferma to sneak into the company's bank account and steal nearly half a million dollars.

As with many recent hacks, many associated with the Zeus Trojan, a rogue program planted by the attackers, transferred $447,000 to various financial accounts while Ferma's account manager banked online. The demolition firm had a knowledgeable IT manager and used a one-time password generator to secure access to the bank -- but because the attack came from its own computer, the company didn't stand a chance.

Ferma recovered about 60 percent of the money, but its bank refused to repay the remainder. Many companies have sued their banks to recover their losses, but others are taking a different approach: cyber risk insurance.

"Small companies can lose their whole business if they are not careful, so they should consider offloading some of their risk with insurance," says Larry Clinton, president of the Internet Security Alliance.

Cyber risk insurance is more than a decade old, but is a rapidly expanding market. This year companies will take out around $600 million in premiums for cyber risk, according to estimates from Betterley Risk Consultants, a Sterling, Mass., consulting firm.

Like Ferma, small and midsize businesses that do little business online may find they are the targets of online thieves. While cyber risk insurance is generally sought out by those companies that fear a breach that exposes customer data, it can also help SMBs survive a catastrophic loss, experts say.

Some companies have already seen the benefits from such policies. Online criminals stole $35,000 from Brookeland Fresh Water Supply District earlier this year, but the organization's bank recovered less than half of the money. But because Brookeland was insured, its insurance company paid all but a $500 deductible of the remaining losses, according to a recent report.

"A lot of businesses that were not the large players believe that they would not be the targets of cyberattacks," ISA's Clinton says. "The research has indicated that that is not at all the case. Smaller organizations have, according to some research, a larger chance of being attacked."

Generally, cyber risk insurance covers losses from almost a dozen different threats to business, including viruses, unauthorized access, personal injury, and loss of use. Covered damages include remediation, loss of property or services, and the cost to resecure systems and networks.

Yet, cyber insurance isn't a no-brainer. Policies tend to be costly because it is not always easy to assess the risks to a company's business, according to the Betterley report.

"We do have some concern that the claims for post-breach response are turning out to be more common and more expensive than carriers might have expected," the report states.

Underestimating the costs of cyberattacks has been a major hurdle for insurance, agrees Joshua Corman, research director of The 451 Group, an analyst firm.

"It is logical and intuitive that we would get to some maturity level in the industry that security would embrace insurance, but the devil is in the details," Corman says. "There are so many uncontrollables, however, that it may not be tenable."

For companies interested in assessing policies, the Internet Security Alliance provides a free publication, Financial Management of Cyber Risk: An Implementation Framework for CFOs.

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