What is Cyber Insurance? (And Is It Worth the Costs?)

Cyber attacks have grown significantly over the last few years, and their cost to victim organizations marches ceaselessly upward as well. Now many of those victim organizations are learning the hard way that business insurance policies often won’t cover the regulatory fines from security incidents that are considered “preventable.”

Hence the need for extra protections from “cyber insurance” to fill any coverage gaps you might have.

What Is Cyber Insurance?

Cyber insurance is a type of insurance policy that covers an organization in the event of a cybersecurity incident. The policies typically cover costs such as technical procedures to recover lost data, repair of damaged equipment, business interruption, and notifying affected customers. They can also help with the cost of lawyers or other advisers in the event of a cyberattack.

Cyber insurance can help countless organizations, but companies should not consider it a cure-all for the organization’s cyber risks – and in some instances, cyber insurance might not help much at all. If you are considering cyber insurance coverage for your business, you’ll need to evaluate numerous factors to determine whether it’s the right choice for your organization.

How Does Cyber Insurance Work?

A company obtains cyber insurance in the same way it acquires other business insurance policies: you consult an insurance agent. Many vendors sell policies for various needs, such as errors and omissions insurance, liability insurance, and property insurance. Cyber insurance is just another policy.

Cyber insurance plans often include “first-party” coverage limits, which refers to damage that directly harms an enterprise; and “third-party” coverage, which refers to losses sustained by other companies that have a business relationship with the affected organization. For example, first-party insurance coverage would cover the expenses of informing your customers of a data breach or the data recovery of your systems. Third-party coverage will pay the legal cost if a customer sues your business for carelessness after a cybercriminal stole and used the customer’s sensitive information.

Cyber coverage compensates an organization for any financial damages incurred due to a cyberattack or data breach. It also assists with any costs associated with remediation. This can include paying for the investigation, crisis management and communication, legal services, and consumer reimbursements. Cyber insurance premiums automatically cover some expenses, and then you can add other items to your liability coverage for a higher premium.

What Isn’t Covered by Cyber Insurance?

Cyber insurance is not a perfect solution. While most insurers cover fundamental security breaches, insurance claims usually won’t cover loss of intellectual property or the public relations harm that may result from a cyber event. In addition, there are likely to be repercussions for security failures that you will need to handle yourself, and relying exclusively on insurance can still leave your business facing surprise costs and consequences.

Moreover, some insurance companies may want to dictate how you respond to a breach; your organization might find that restrictive. Your insurance company could also require you to use its approved vendors and legal teams, even if you prefer to use your advisers instead.

Pricing for cyber insurance can also be inconsistent, depending on the insurer and the coverage limits for your policy. This is because attacks are becoming more frequent, complex, and effective; pricing out that risk is simply a tricky thing for insurers to do. In addition, since the cyber insurance market is relatively new, there can be significant discrepancies between what you pay and the benefits you receive. This makes it difficult for small businesses to get adequate coverage.

The Benefits of Cyber Insurance

The primary benefit of cyber insurance is coverage in case of emergency. Knowing this safety net exists can bring peace of mind to your stakeholders and board members. Future clients may also feel reassured that if a cyber incident happens, a mechanism is in place for compensation for stolen customer information.

Cybersecurity insurance firms also typically provide resources and additional assistance when breaches occur. This legal guidance and referrals to specialists can be invaluable for companies that are otherwise unprepared for the severity of a breach.

Cyber insurance policies can help create awareness for cybersecurity compliance needs at your organization and strengthen your overall security measures and program. That said, it’s still crucial that you not become complacent about security risks; insurance is only one part of a robust unified risk management system – not a replacement for it.

The Downside of Cyber Insurance

There is some debate among cybersecurity professionals about whether cyber insurance encourages cybercrime and ransomware attacks.

Such attacks have increased over the last several years, and ransom demands are rising steadily in price. Some people argue that having an insurance policy tempts companies simply to pay the ransom demanded by the hackers, which encourages cybercriminals to target that company again in the future. (Regardless, most security professionals advise against paying a ransom since that gives hackers more funds for future attacks.)

Proponents of insurance argue that it’s always the business owner’s choice whether to pay the ransom, and that many will choose to pay because that might be easier and cheaper than rebuilding a damaged IT network.

Some insurance providers have decreased their coverage for cyber extortion (read: ransomware attacks) to discourage organizations from paying the ransom. Some have also added coverage exclusions for foreign enemies to dissuade their customers from cooperating with cyber terrorists.

If you are concerned about ransomware, don’t assume insurance coverage will solve your problems. Instead, create a strong defense against hackers and malware to prevent breaches.

Do I Really Need Cyber Insurance?

According to the IBM Cost of a Data Breach Report 2023, the global average cost of a data breach in 2023 was $4.45 million, a 15 percent increase over three years. Cyber liability insurance helps businesses to remain functional following an attack.

Cyber liability insurance is critical. At a minimum, cyber liability insurance assists businesses in cyber compliance with state rules requiring them to notify consumers of a data breach containing personally identifiable information. Policies may also include:

• Compensation for legal bills and expenses
• Notifications to customers in the case of a breach
• Option to monitor the information of affected persons for a set time
• Costs associated with recovering corrupted data
• Repair costs for damaged computer systems

Do Small Businesses Need Cyber Insurance?

Well, consider this: Identity thieves often target small businesses since they have fewer defenses than larger corporations.

Cyber liability insurance coverage supplements and supports a company’s recovery attempts after a hack. The insurance carrier will help find professional resources and provide financial assistance during a data breach’s investigation, notification, recovery, and post-recovery phases.

ZenGRC Can Help You Prevent Cyberattacks

Cyber insurance is a worthwhile option, but it can’t be your entire strategy. Your best approach is to build strong defenses against attacks regardless of whether you’re insured.

Staying on top of threats actively versus being reactive can be challenging no matter the size of your company, and increasing scale often decreases transparency into your risks. So how can you ensure that all threats are accounted for?

The ZenGRC is a risk and compliance solution that makes tracking and analyzing threats throughout your company more straightforward than ever before. ZenGRC provides a clear view of your company’s threat landscape and includes automation and integration to help prevent cyber threats before they strike.

Schedule a demo to learn how ZenGRC can help you build a solid first line of defense for your company’s data security.