Should You Buy Cyber Insurance in 2024? Pros & Cons

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Running a business means relying heavily on digital tools and infrastructure. While this has opened up countless opportunities for growth and innovation, it has also exposed businesses to a new set of risks: cyber threats.

As threats like data breaches, ransomware attacks, and system hacks become increasingly commonplace, this safety net can be the difference between weathering the storm or going under.

Despite numerous cybersecurity defense solutions, data breaches remain common, with stolen credentials flooding the dark web.

In 2020 alone, over 700,000 attacks against small businesses totaled $2.8 billion in damages, and according to recent IBM data, the average cost of a cybersecurity incident surpassed $4.45 million in 2023.

Whether a database is left exposed to the internet due to a misconfiguration, a vulnerability is left unpatched, or a lower-rated vulnerability isn’t prioritized due to a lack of risk assessment, these and other issues increase an organization’s attack surface. This reality highlights an organization’s vulnerability, often unbeknownst to them until it’s too late.

These exposures underscore the critical importance of proactive cybersecurity measures that organizations must adopt: a layered security approach that includes cyber insurance and integrates advanced technologies and best practices to strengthen their defenses against sophisticated cyber threats.

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Key Takeaways

  • Cyber insurance protects businesses financially from losses due to cyberattacks, covering expenses like investigation costs and income loss during downtime.
  • Cyber insurance should enhance, not replace, comprehensive cybersecurity measures such as regular security assessments, phishing awareness training, and incident response planning.
  • Businesses can employ Cyber Risk Quantification (CRQ) tools to estimate the financial impact of cyber incidents and showcase their cybersecurity effectiveness to insurers.
  • It’s essential for businesses to meticulously review their cyber insurance policies, understanding both first-party coverage for direct costs and third-party liability for claims from affected external parties.
  • Cyber threat evolution often surpasses risk assessment, potentially leading to inadequate protection. Current policies may not cover non-monetary losses or pre-existing issues, which particularly challenges SMEs with high premiums and limited coverage.

What is Cyber Insurance?

Cyber insurance – also known as cyber liability insurance or cybersecurity insurance – offers a financial lifeline to businesses facing these risks by covering losses resulting from cyberattacks or data breaches.

Who Needs Cyber Insurance?

Okay, so you’ve stretched your IT security budget and implemented mitigating controls to strategically protect your precious assets identified and recorded in your golden source database.

However, breaches often highlight an embarrassing gap in a so-called secure implementation or the absence of well-thought-out strategic control measures appropriate for what you are trying to protect. You might even think that some organizations aren’t taking the threat of a breach too seriously.

Remember, effective cybersecurity is not just about having the right tools; it’s also about implementing a robust security framework and a strategy that encompasses education, awareness, and continuous monitoring, not forgetting due diligence and adequate insurance coverage.

It is reported that 1 in 3 US companies has obtained data-breach insurance coverage or cyber liability insurance, highlighting the growing recognition of the importance of protecting against cyber threats.

Even with security controls in place, the cyber insurance market is projected to reach $20 billion by 2025, reflecting the increasing demand for properly configured cybersecurity risk mitigation measures.

Having cyber insurance can help mitigate these costs. Additionally, cyber insurance can cover expenses related to breach investigations and loss of income during downtime. This is especially helpful for businesses that rely heavily on online operations, transactions, or communications, as they are more vulnerable to cyber-attacks and data breaches.

What Does Cyber Insurance Cover?

Depending on the policy you take out, and your region, cyber insurance can cover data breach response costs, including the cost of investigation, along with data restoration, business interruption losses, and claims by third parties resulting from a cyber attack.

There may also be legal and regulatory costs, and costs related to violating privacy laws.

With Cyber Risk Quantification (CRQ) tools, businesses can assess the potential financial impact of a cyber incident and demonstrate to insurers the value of their cybersecurity measures.

By including cyber insurance in their business risk assessment, organizations can transfer some potential financial burden of data breaches caused by cyber-attacks.

Imagine various what-if scenarios concerning data breaches within specific timeframes: 7 days, 31 days, or even 100 days after a cyber attack. Cyber insurance is a safety net to tackle these unpredictable events, strengthening your company’s resilience against potential cyber threats.

Having a cyber insurance coverage checklist should be part of any business’s security best practices.

Image showing a checklist for cyber insurance

What is Cyber Insurance Coverage?

When a business invests in a cyber insurance policy, it is essential to carefully review the coverage details, financial limits, exclusions, and deductibles outlined in the policy.

First-Party Coverage

This insurance provides first-party coverage to address the direct costs incurred by the business in the aftermath of a cyber incident.

These expenses may include investigating breaches, restoring systems, recovering data, and managing ransomware demands. Moreover, cyber insurance policies commonly cover various first-party damages like data restoration, loss of income from operational disruptions, crisis management services, and legal expenses associated with privacy-related lawsuits.

Liability Coverage

Additionally, third-party liability insurance options offer protection against claims made by external parties who may have been adversely affected by the breach, such as customers or partners, covering legal fees, settlements, and any damages awarded.

This dual-layered approach ensures that businesses are comprehensively protected against the multifaceted risks of cyber threats.

However, organizations considering cyber insurance must understand that these policies complement rather than replace robust cybersecurity measures. The best approach combines proactive defense strategies—like regular security assessments and employee training on phishing awareness—with reactive solutions like incident response plans.

Navigating Cyber Insurance Claims

In the regrettable event that you fall victim to a cyber incident, it’s imperative to swiftly get in touch with your insurance provider to set the wheels of the claims process in motion. This initial step is crucial for a smooth resolution.

You should furnish them with exhaustive documentation that clearly depicts the incident. This includes forensic reports that meticulously detail the nature and extent of the breach, alongside irrefutable evidence of financial loss incurred as a direct consequence of the cyber attack.

Armed with this information, your provider will assess your claim against the backdrop of your policy terms to determine the extent of compensation you’re entitled to. This careful review ensures that all parties adhere to the agreed-upon protections and limitations, facilitating a fair and equitable outcome.

Beyond financial aid, insurance providers offer valuable resources like incident response teams, cybersecurity experts, and forensic technology specialists. They assist with system restoration, data recovery, and implementing strong security measures against future threats, ensuring business continuity.

The Benefits of Cyber Insurance

Financial Protection

Cyber insurance offers financial protection for businesses against cyber incidents, which can cause significant losses due to data breaches, system disruptions, or legal liabilities. It allows companies to transfer these risks to insurers, easing financial recovery by covering investigation costs, legal fees, PR campaigns, and potential lawsuits.

Business Continuity

Cyber insurance significantly contributes to business continuity by providing resources and support during cyber incidents, minimizing downtime, productivity loss, and reputational damage. Insurers offer access to expert teams for system restoration, data recovery, and implementation of security measures, enabling quick resumption of operations and preserving customer trust.

Risk Management

Cyber insurance significantly contributes to business risk management by encouraging proactive cybersecurity measures. Before offering coverage, insurers evaluate a company’s security posture, prompting organizations to address vulnerabilities and enhance their defenses.

Are You Truly Protected With Cyber Insurance?

While cyber insurance offers significant benefits as a risk management tool, it has specific challenges and limitations that businesses must understand.

Evolving Cyber Threat Landscape

One of the primary challenges of cyber insurance is the rapidly changing nature of cyber threats. As hackers become more sophisticated and new attack vectors emerge, it becomes challenging for insurers to assess and quantify the potential risks accurately. This can lead to coverage gaps and inadequate protection for businesses, as policies may not adequately address emerging cyber threats.

Lack of Standardization

Another limitation of cyber insurance is the lack of standardization across policies and coverage options. Each insurer may offer different terms, conditions, and exclusions, making it difficult for businesses to compare policies and make informed decisions. The absence of a standardized framework often leads to confusion and uncertainty regarding what is covered and what is not, creating potential disputes during the claims process.

Limited Coverage for Non-Monetary Losses

Cyber insurance policies typically focus on financial losses resulting from cyber incidents, such as business interruption, data restoration costs, and legal expenses. However, non-monetary losses like reputational damage, loss of customer trust, and diminished brand value may not always be adequately covered. These intangible losses can have far-reaching consequences for businesses, and their limited coverage can expose them to significant risks.

Exclusion of Pre-Existing Weaknesses

Most cyber insurance policies exclude pre-existing weaknesses or inadequate security measures. Insurers may require businesses to adhere to specific cybersecurity standards or practices to qualify for coverage. This poses a challenge for businesses already struggling with outdated infrastructure or limited cybersecurity measures, as they may need help to obtain comprehensive coverage or incur additional expenses to meet the insurer’s requirements.

High Premiums

High premiums are a significant barrier for many businesses, particularly when seeking cyber insurance for a small business, that may find the cost of cyber insurance prohibitive. Policy pricing often reflects the current state of the threat landscape, its high-risk nature, and the potentially devastating financial impact of cyber incidents.

A Silver Lining

Consider getting a Cyber Essentials certification to enhance your business’s cybersecurity. This UK government-backed scheme helps protect against common threats and shows clients/partners your commitment to data safety. It can also provide a competitive edge in today’s security-focused digital landscape.

At the time of writing, if a business in the UK is certified with Cyber Essentials, they would be eligible for free cyber liability insurance, subject to specific criteria:

  • The business must have Cyber Essentials certification at the basic or plus level.
  • The business must be certified with an IASME certification body.
  • The business must have an annual turnover of less than £20 million.
  • The business must be domiciled in the UK.

        If the business meets these requirements, it will be eligible for free cyber liability insurance coverage up to a limit of £25,000. Keep in mind this limited cover may not meet your total requirements.

        The Cyber Essentials scheme sets out five basic cyber security controls that organizations should have in place:

        1. Firewalls and gateways
        2. Secure configuration
        3. Access control
        4. Malware protection
        5. Security update management

        By implementing and maintaining these essential controls to meet the CE standards, organizations can significantly reduce their vulnerability to common cyber threats by 80%, including phishing, ransomware, and other types of malware.

        Top Cyber Insurance Companies in the US

        1. Chubb
        2. AXA XL
        3. AIG
        4. Travelers
        5. AXIS
        6. Beazley
        7. CAN
        8. BCS

        This list showcases leading US insurance providers specializing in cybersecurity, representing roughly 40% of the market.

        Their robust policies, financial stability, and proactive risk management strategies demonstrate their understanding of digital threats. Offering tailored solutions, they protect businesses from cyberattacks, making them essential partners in today’s digital economy.

        The Bottom Line

        In our current unsettled world of constant cyber threats from malicious actors, state-sponsored attacks, and hacktivists, cyber threats loom large, and businesses are constantly at risk. Cyber insurance offers protection, resilience, and a pathway to a helping hand in times of uncertainty.

        The question isn’t whether you can afford cyber insurance but whether you can afford to be without it.

        By adopting well-thought-out defense strategies, organizations demonstrate their commitment to safeguarding their interests and those of their customers, whose trust they value immensely.

        Remember, being proactive in cybersecurity isn’t just about avoiding fines or legal penalties; it’s about building a strong reputation as a reliable partner that puts customer privacy at the forefront.

        With this mindset, businesses can foster trust among stakeholders – internal teams and external clients – thereby enhancing overall brand value in the long run.

        FAQs

        What is cyber insurance or cyber liability insurance?

        Who should get cyber insurance?

        What does cyber insurance cover?

        What are the obstacles to cyber insurance, and how can businesses address them for complete protection?

        What does cyber insurance not cover?

        How much cyber insurance do i need?

        Is cyber protection insurance worth it?

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        John Meah
        Cybersecurity Expert
        John Meah
        Cybersecurity Expert

        John is a skilled freelance writer who combines his writing talent with his cybersecurity expertise. He holds an equivalent level 7 master's degree in cybersecurity and a number of prestigious industry certifications, such as PCIP, CISSP, MCIIS, and CCSK. He has spent over two decades working in IT and information security within the finance and logistics business sectors. This experience has given John a profound understanding of cybersecurity practices, making his tech coverage on Techopedia particularly insightful and valuable. He has honed his writing skills through courses from renowned institutions like the Guardian and Writers Bureau UK.