Cyber insurance becoming vital as breaches increase
In 2015, cyber insurance reached a market cap of $2.5bn and it's expected to grow exponentially as more and more transactions are conducted online. Last year, US e-commerce sales topped $340bn and each sale had to transmit sensitive information across secure servers. However, data breaches are occurring at an alarming rate, leading to greater need for cyber insurance. Currently, 90% of all such breaches affect small businesses, and the average cost of a data breach is $154 per record.

Although there are federal regulations dictating how businesses of every size handle private information (HIPAA, SOXBY, PCI-DSS, GLBA, FERPA, et. al.), many small businesses assume that simply meeting these regulations is enough. However, small businesses are a unique target for hackers and data breaches do occur, with increasing regularity. While many big businesses make the news, it’s small businesses that are often targets. According to the First Data Corporation , 90% of all data breaches that occur affect small businesses.

All of these sales must pass through secure, online servers, either hosted by the company or remote cloud servers hosted by one of many cloud hosting services. While all of these sales are beneficial to companies, it often requires the transfer of a significant amount of data. Much of that data includes customer account information, such as usernames, passwords, and identifying information such as addresses, phone numbers and, at times, even Social Security and credit card numbers.

The growth of the internet has been a distinct boon to everyone — especially small businesses. As of 2016, there were over 3 billion internet users, so this number is quickly approaching half of the world’s estimated population. Similarly, internet commerce is quickly becoming a key part most modern economies. In the U.S., e-commerce sales alone topped $340 billion in 2015.

Data Breaches Are Costly

A 2015 Ponemon Institute report shows that the average cost of a data breach was $154 per record overall, and $170 per record for malicious cyberattacks. These numbers include the costs associated with detecting and responding to a data breach. Data breaches are extremely costly to both the company and the customers. Even still, many small businesses may be surprised to hear they may not be purchasing the proper insurance to cover these costs.

The cyber insurance market is certainly growing — up to $2.5 billion in 2015 — yet it may still be underutilized when one considers the amount companies are spending on data breaches each year. While small businesses may absorb a lower cost depending on their situation, the reality is that most don’t actually have to absorb the majority of the cost. As only a small percentage of small businesses have Cyber Liability Insurance policies in place, most small businesses are at a high risk of seeing significant out-of-pocket expenses should a data breach occur.

Cyber Insurance is Misunderstood

In most cases, the reason why a business may lack the proper cyber insurance protections is a mixture of confusion as to which party is liable, and incomplete information regarding the restrictions of their own insurance policies. Most small businesses already have several forms of insurance, however few standard insurance policies, such as a General Liability or Professional Liability policy, will also cover liability for data breaches, or they’ll only cover a restricted amount. At times, a cybersecurity or data breach endorsement can be added to a more common insurance policy, but this needs to be inquired about specifically.

The assumption that a policy extends to data breaches also lies in the fact that it’s not necessarily intuitive to understand culpability in the event of a data breach. Many businesses believe that the fault or responsibility in a data breach lies not with them, but with the credit card company or data hosting service, if for example they keep sensitive data in the cloud. However, even if someone’s account information is fraudulently used, the source of the breach can, and often will be, held at fault.

On a similar note, many businesses believe that software companies should bear some brunt when holes are found in their software that leads directly or indirectly to a breach. Even still, the business where the breach occurred will usually be found responsible. Faulty third-party software does not excuse a company from liability, even if the business was not fully responsible for the breach.

Additionally, First Data found that in 2011, 96% of businesses that suffered a data breach were not compliant with federal regulations meant to protect customer credit card data. One would hope more companies are conscious of the dangers 5 years later, but for a new business owner these regulations may seem confusing and it may seem difficult to ensure compliance. Therefore, it seems that there’s a real opportunity for companies to better protect themselves and grow their business with financial security by taking the time to understand Cyber Liability Insurance and their potential risk when it comes to data breaches.

———-

Educating and assisting shoppers about financial products has been Maxime Rieman’s focus, which led her to join as Director of Product Marketing at CoverWallet, a startup dedicated to simplifying insurance for small businesses. Previously, she launched the personal insurance team at NerdWallet, and helped create an innovative brokerage comparison product.