Manufacturers Vulnerable to Cyberrisk

Manufacturing companies face a serious threat from cyber criminals. According to IBM’s latest intelligence index, theirs is now the second-most targeted sector, after attack numbers increased significantly year-on-year. This heightened risk is compounded by increased vulnerability: the connectivity that manufacturers have embraced to bring about greater operational efficiencies is accompanied by significant and largely uninsured exposures, such as physical damage arising from cyber incidents or loss of income due to stolen intellectual property.

Part of the vulnerability lies in process control and supervisory control and data acquisition (SCADA) systems. Previously deemed impenetrable, due to their proprietary and highly customised networks, the convergence of these industrial control systems with enterprise infrastructure, particularly web services and ethernets, has created a potentially catastrophic risk. Such connections and the increasing Industrial Internet of Things (IIoT) can drive through great advantages, but also simultaneously produce weak links that manufacturers can not afford to overlook.

For example, expensive capital assets such as production machines will be retrofitted with technology that allows them to be connected to corporate networks. But they were typically built without the sophisticated measures to afford cyber-protection, or have operating systems that are incompatible with current cyber-security products. All these factors make manufacturers’ industrial control systems particularly vulnerable to cyber-attack.

Physical damage
Physical damage arising from cyberattacks has to date been relatively rare. Early high-profile events, such as claims that Russians hacked into U.S. water treatment facilities to damage pumps, or the Israeli-U.S. ‘Stuxnet’ attack on Iran’s nuclear centrifuges were believed to be state-sponsored.

One of the most underestimated threats to manufacturers is the rogue employee, disillusioned with their employer or falling victim to blackmail. One such attack involved a German steel mill. Hackers, thought to involve a rogue employee, took over its industrial control systems via its enterprise system, preventing employees from shutting down a blast furnace. This caused irreparable damage to expensive equipment and yet physical damage, as well as bodily injury caused by a cyber event, is typically excluded on most policies. The rise of the hackers-for-hire phenomenon further multiplies potential sources of attack, with competing companies looking to use third parties for corporate espionage, for example.

Stolen Innovation
Other rising areas of threat revolve around the significant non-physical assets residing in manufacturers’ information systems. Cyber theft of intellectual property (IP) has been difficult to insure properly, despite the extraordinary value of items such as the technical specifications of a new product, or the composition of a new pharmaceutical. PwC reports that the number of such thefts, notably of product designs, has doubled.

While competition is a big driver of IP cyber theft, risks such as the loss of income due to stolen IP or the legal pursuit of it are not currently insurable. When you consider the degree to which a manufacturer’s value will be directly linked to their IP, this represents a considerable risk but also one where evidencing and quantifying a loss is very difficult.

Cyber attacks are now identified as the leading cause of supply chain stoppages but supply chain risk is also largely uninsured. Some losses, like business interruption arising from a cyber incident on an IT provider’s network, can sometimes be covered but an interruption caused by a product supplier’s cyber-event typically cannot. Upstream supply risk, associated with liabilities arising from failure to supply goods following an attack, is also difficult to insure.

Market developments
According to research by consultancy BDO USA, 92% of manufacturers cited cyber-security among their top 10 risk concerns in 2016, up 44% from 2013. Another study, however, found only 8% of manufacturers “very confident” in their ability to prevent an IT breach.

This rising risk issue demands action from all parties. Manufacturers must invest further in heightened security and control for their operating technologies, while cyber insurance specialists must continue to develop further sophisticated solutions to more effectively transfer manufacturers’ unique exposures. Insurance carriers are starting to work together more effectively across lines to more sufficiently underwrite the complex cyber risks facing the sector. Failure to respond to this new era of cyber threats and vulnerabilities will leave manufacturers exposed to reputation and physical damage, bodily injury, severe business interruption, loss of intellectual property, and significant financial loss.

Companies Must Evolve to Keep Up With Hackers

If you ask a CFO if their company’s current cybersecurity strategy is working, it’s very likely that they do not know. While at first they may think it is, because the company’s bank accounts are untouched, an adversary could be lurking in their network and collecting critical data to later hold for ransom—threatening to destroy it if the money isn’t paid. The truth is that many organizations are lacking effective risk management that ensures the integrity and availability of their most essential data.

Corporate America needs to take the power back and stop hackers before they compromise networks and exfiltrate data for criminal uses, or simply threaten to destroy it for financial gain. To shift the power back in their favor, they must safeguard data, implement an effective risk management program, and invest in risk reduction activities. Organizations need to assess the maturity of their cybersecurity efforts, determine if they have any pre-existing conditions, and focus on risk reduction efforts that truly protect their data, while ensuring the ability to deliver products and services.

The fastest way to check for pre-existing conditions is by doing a compromise assessment to identify any current suspicious activity within their network. From there, they can determine what exactly needs to be done to reduce their organization’s cyber risk and develop a risk management plan that outlines clear steps for protecting their most critical assets.

To develop a cybersecurity risk management plan, executives need to first define the company’s “crown jewels”—the things that if compromised, would cause the most damage or inhibit the ability to deliver products or services that generate revenue. For instance, for a bank, this could be access to funds by their individual or business customers, or banking information that could be used for fraudulent purposes. Once an organization knows what it’s protecting, the executives can then create a security roadmap that ensures the secure delivery of products or services.

The security roadmap should start with a business impact assessment that identifies those crown jewels that are needed for delivery of essential services or producing products. These can include the data itself, technical architecture or systems used by their customers to transact business. Once these have been identified a prioritized risk reduction plan needs to be developed and tracked by the company’s leadership. Every facet of risk should be considered, from legal risk, to the consequences of a data breach, or inability to deliver services resulting from an intrusion or denial-of-service attack.

While security assessments and roadmaps are essential for defining an organization’s adequate cyber defenses, one of the biggest mistakes we see businesses make is being reactive when it comes to their defenses—relying on traditional technologies that only identify known threats and leverage Indicators of Compromise (IoCs). This method does not capture new exploits fast enough, nor versions of malware or other obfuscation techniques that are introduced by sophisticated adversaries. A great example is the sheer speed at which WannaCry ransomware spread to organizations of all sizes across the globe. Adversaries are capitalizing on this reactive security shortcoming by taking advantage of this window of opportunity to comprise data or networks.

Instead, organizations must take a proactive approach that focuses on indicators of attack (IoAs) that identify adversary behavior indicating malicious activity, such as code execution or lateral movement. IoAs can alert businesses to adversary activity before any damage is done. To effectively make use of this data, businesses also need to leverage threat intelligence for deeper insights into these IoAs.

Threat intelligence provides a crucial layer of information on adversary motives, tactics, techniques and procedures. For instance, a bank could look at a threat and see if this particular adversary typically targets the financial services industry, which regions they operate in and the motive behind their attacks.

Going one step further, organizations should leverage technology that enables threat intelligence to be shared rapidly and can protect numerous customers at once. At the end of the day, effective security requires a community effort. Corporate America needs to come together and truly leverage the power of crowdsourced intelligence—to keep from becoming victims of the next big attack.

From a lack of risk management plans, to reliance on reactive security measures, there are a number of areas where companies are falling short of having an adequate cyber defense. By putting the necessary plans in place to secure the integrity of their critical data, taking a proactive approach to cyber threats and working together across industries and businesses, corporate America can collectively build a stronger cyber defense.

Reputational Crises Put CEOs at Risk

When reputational crises hit, market cap, sales, margins and profits are all on the line. And these situations are becoming more frequent—and more costly—than ever, with a recent study showing an increase in losses from reputational attacks increasing by more than 400% in the past five years.

But it is not only the corporate entity facing challenges, individuals in leadership—particularly CEOs—face personal risk as well. It has become clear that CEOs need tools to protect themselves as well as their companies’ reputations. Since damage from reputational attacks takes place in the court of public opinion, traditional liability solutions, such as directors and officers coverage, are not effective. But new tools are available in the form of a reputation assurance solution that can help deter attacks from even happening and bundled insurances to mitigate the damage when they do occur.

Research by Steel City Re has found that:

  • Financial losses related to reputational attacks have increased by more than 400% in the past five years, a trend that continues.
  • There is an increase in public anger and, as a result, more blame is being cast upon recognizable targets, such as CEOs.
  • Anger by stakeholders is fueled by disappointment—the gap between expectations and reality—which is all too often fueled by the company’s own actions.

Against that backdrop, the turnover rate among CEOs is increasing, with 58 of the S&P 500’s CEOs transitioning out of their jobs in 2016 according to SpencerStuart (although not all as a result of reputational crises). That is the highest number since 2006, a 13% increase over 2015, and a 57% increase over 2012.

If that weren’t enough reason for concern, history shows that when strong companies and their brands come under fire, their reputations eventually recover, despite the initial and medium-term impacts. Individual reputations of those companies’ leadership are not nearly as resilient, however, especially at a time when society; be it the media, social media, politicians or direct stakeholders; seems intent on personifying crises and affixing blame on individuals in positions of authority. And for CEOs, a reputational crises can affect their career and compensation for many years ahead.

In this environment, it is essential that risk managers understand the tools that are available to protect both companies and senior executives personally. Serving as a third-party warranty and available only to highly qualified insureds, reputation insurance attests to the efficacy of the company’s governance and operational practices, as adopted and overseen by the board and implemented by the CEO. Such coverage can deter reputational attacks in much the same way as a security sign on the front lawn deters burglars. It is a sign of quality governance. And when incidents do occur, it provides a built in alternative narrative to counter the attacks that are bound to occur. Finally, it gives the company and key individuals financial indemnification to mitigate any damage that ultimately does take place.

Just as “doing the right thing” did not protect directors and officers from liability in the era before the wide adoption of D&O insurance, it is no guarantee that attacks in the court of public opinion won’t take a significant financial toll. But it is one of the few solutions proven in the court of public opinion. In today’s culture, reputations are in jeopardy as never before and risk managers must utilize all tools available to protect those on the front lines.

Telemetry Data: What Information Works Best?

Direct measurement of driving behavior, the heart of usage-based insurance (UBI), is the best way to match risk to premium. Insurers offer insurance discounts to safe drivers via UBI in order to acquire and retain the best risks. As a result, safer driving is promoted among these customers, which can amount to savings for organizations insuring drivers.

UBI is among the first attempts by insurers to adopt state-of-the-art technology for the underwriting process. Insurance companies and other service providers have struggled with some essential questions including those about the kind, resolution, frequency, and duration of data to collect, as well as what sensors to use. Indeed, many companies underwent independent efforts to establish data collection methodologies, generally resulting in a lack of any industry standard data “dictionary” or shared methodology for UBI. Still, it is possible to identify common approaches to collecting UBI data and how they are likely to evolve in the future.

Since the initial trials of UBI, the three cost factors—hardware, data, and analytics—have been the primary considerations as to how and what data elements each company collects. And even though prices of all three generally continue to decrease, the typical cost of setting up a full UBI program with filed predictive models remains significant. In the absence of industry-wide standards, it can be difficult to outline the breadth of the types of data collected. Even so, the following list covers most of the UBI data types found in the auto insurance market:

Verified mileage: This most basic mean of UBI is based on the well-validated assumption that more driving means more exposure to risk. Still, the advantage of verified mileage over declared mileage alone usually doesn’t justify a UBI operation for many companies.

Trip timing: A small advancement over verified mileage is trip timing. This goes beyond the pure mileage factor to estimate risk by studying when a driver is on the road, on the premise that some time slots tend to be riskier than others (Friday night, for example, with associated risk characteristics such as fatigue or drunk driving).

Driving events: Basic, yet powerful, behavioral aspects of driving are measured through collection of driving event data, mostly braking, accelerating, and turning. Sometimes absolute speeding events (exceeding 80 mph) and relative speeding events over the posted speed limit are recorded. Note, however, that onboard telematics units have relatively limited accuracy in collecting such data.

Full data log: As dongles came to market, they introduced improved collection capabilities, such as advanced GPS modules, CPU, accelerometers, OBDII, and large storage. With the falling cost of mobile data, companies started collecting full data logs and compressed them on dongles. Full data logs may provide endless analytics opportunities.

Smartphone data: The first technology to break the cost paradigm centering on device, data, and analytics is that operating from smartphones. Smartphones are also smart telematics devices owned by many, offering great collection and storage capabilities and data transfer at practically no additional cost. Unfortunately, smartphone data introduces many analytic challenges, including not knowing whether an insured is a driver or a passenger, whether the phone is turned off, and whether a driver operates an insured car.

What should we expect in the future? Against the background of rapidly changing technology and growing analytic complexity, future UBI is likely to rely on some of the following data elements:

Mobile data: As mobile apps become more sophisticated and reliable and as phone sensors become more accurate, more insurers are likely to use data obtained from mobile apps as a low-cost solution.

OEM data: Connected cars are growing in number (Gartner forecasts that by 2020, some 250 million cars will be connected). Data sets collected by connected cars aren’t as rich as those collected by dongles and provide more basic attributes (such as verified mileage, trip timing, and driving events). Nevertheless, they allow insurers to consume data more easily through data exchanges, where original equipment manufacturers (OEMs) take responsibility for the data collection process. Clearly, OEM capabilities will probably become even more advanced as manufacturers see more value from their investment.
Distribution of projected connected cars (source Business Insider)

Advanced Driver Assistance Systems (ADAS) data: ADAS can provide driving alerts and override driver inputs in certain situations. To date, these devices haven’t become part of the UBI ecosystem but can potentially contribute tremendous value to analytics for driving behavior and may play a significant role in the future.

A final question about autonomous cars: Will they render UBI obsolete? Probably not, and for two reasons. First, penetration of autonomous cars and shared vehicles may well be slow and gradual. Second, many events currently measured by UBI will probably remain important when autonomous driving is used (for example, time and destination of journeys). UBI is likely here to stay.