Cyber Insurance and the Growing Need for a Federal Backstop
Introduction
Cybersecurity experts agree that cyberattacks are on the rise, prompting many organizations to seek better ways to cope with this menace. One of the solutions that have gained popularity in recent years is cyber insurance. However, this arrangement comes with challenges, chief among them being how to measure and mitigate catastrophic, widespread cyber events that implicate many policyholders. As a result, federal cyber-insurance backstops have emerged as one of the potential tools for addressing the systemic risk of such events.
What is a Cyber-Insurance Backstop?
A federal cyber-insurance backstop involves the US government stepping in to provide aid (likely at least in part financially) to stabilize the economy in the event of a catastrophic and widespread cyber incident. The framework would set requirements for qualifying private insurers and policies that may access federal support. A federal insurance backstop would transfer remote but potentially catastrophic risks from qualifying insurers (or their policyholders) to the federal government. These would be systemic risks that insurers cannot sustain on their own due to financial stability concerns.
Potential Benefits of a Federal Cyber-Insurance Backstop
If implemented properly, federal cyber-insurance backstops have various potential benefits for policyholders and insurance companies. These advantages include the following:
Utilizing insurance to enforce better safety
A well-constructed federal backstop can be a way of enforcing better safety overall. By defining what constitutes a catastrophic event, policymakers can identify the activities that reduce the most risk. Insurers can then enforce these activities through underwriting criteria, incentivizing policyholders to mitigate the identified risks.
Putting more capital into the market
By explicitly covering widespread events, a federal backstop can help put more capital into the cyber-insurance market in case of a catastrophe. The availability of capital can ultimately build resilience as a society by enabling fast and effective distribution of funds in the event of a catastrophe. It can also provide a predefined path to remediation and access to experts during a time of need.
Reducing litigation risk
With new exclusionary language coming up in cyber insurance policies, a well-defined backstop could provide increased coverage clarity, ultimately reducing litigation risk. This approach could prevent insurers and the insured from waging costly legal battles over unclear coverage in the event of a cyberattack.
Centralizing a consistent approach to risk management
A federal cyber-insurance backstop could create a more centralized, consistent approach to policy language, ultimately helping support organizations’ security and insurers’ financial stability.
An Industrywide Effort Towards a Federal Cyber-Insurance Backstop
Experts agree that a federal backstop could be a positive move for the security community overall and a step forward in continuing to make cyber insurance a viable option for corporations. This development can also help enforce and encourage better cybersecurity practices from clients by leveraging insurance. To create an effective backstop, cybersecurity experts, insurers, and the federal government must all work together to design a framework that considers the nuances and complexities of the evolving cyber-threat landscape. Its inclusion in the National Cybersecurity Strategy is just the start.
Conclusion
Cyber-insurance is critical to mitigating the risk of cyberattacks in organizations. However, catastrophic, widespread events expose insurers and policyholders to risks that traditional market forces cannot solve. A federal cyber-insurance backstop would provide risk mitigation and financial stability under such circumstances. Therefore, governments and insurance leaders must work together to build a well-constructed backstop that appropriately accounts for the evolving cybersecurity landscape.
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