The Ontario Broker - Volume 22, Issue 5 - 10

INDUSTRY & MARKETS
THE 3 CS OF UNINSURABILITY: HOW TO
MANAGE AND MITIGATE RISK EFFECTIVELY
Matthew Studley CFA, SVP Complex Risk Unit, HUB International
CRYPTOCURRENCY is all over the news these days, but the
risk is high with the recent downturn creating a so-called crypto
winter.
Cryptocurrency is just one example of an extremely difficult-toinsure
class known as uninsurable risk. Since virtually all risks are
insurable, with enough money and time, it's important to define
the term. Generally, uninsurable risks include one of the following
characteristics:
* Premium costs are operationally prohibitive.
* The amount of time needed to obtain coverage is
burdensome.
* Available coverage is exceedingly limited or restrictive.
The question is how to manage and mitigate risk effectively
when faced with these risks.
CRYPTOCURRENCY-AN INDUSTRY EXAMPLE
Commercial clients operating in the cryptocurrency industry
range from start-ups without revenue to highly sophisticated
multi-billion-dollar organizations. Their risk management needs
are very different, but what unites them is their uninsurability.
The small firms realize insurance costs are much higher than they
had first assumed, while the larger firms struggle to obtain broad
enough coverage relative to their size.
From an operational standpoint, the sophisticated firms
safeguard their businesses by relying on indemnity agreements,
contractual stipulations surrounding the custody of private keys,
delineation of hot vs. cold storage or additional technological
protection such as Fireblocks. Yet, many are still relying on basic
insurance products available to the traditional financial services
community.
CYBER SECURITY-A PRODUCT EXAMPLE
Cyber security has become a risk of increasing concern over the
past decade. As a result, the premiums have ballooned while the
coverage has become much more restrictive. With insurers pulling
back, ransomware costs rising, and clients experiencing huge
price increases, the future of cyber-security insurance seems to be
trending toward uninsurable.
With the high cost of business interruption and the liability
associated with a data breach, cyber insurance is no longer
optional. Without these protections, an organization hit by a cyber
attack could be out of business. But, with premiums increasing
aggressively, along with higher requirements just to obtain a
quote, businesses are being stretched too thin.
10
Yet it's possible to demonstrate that you and your organization
are an attractive risk. Tell your story with an emphasis on the ways
you have already lowered your risk. For example:
* What operational risk management procedures have you
invested in since last year?
* Have you done a tabletop exercise with your C-suite to plan
for an eventual cyber security event?
* Which firms do you, or your insurers, have relationships
with to protect legal privilege, or to obtain quick relevant
advice, if a breach was to take place?
* If you needed to pay a ransom demand in cryptocurrency,
how would you do that? Buying a material amount of Bitcoin
on short notice isn't easy.
* Does your firm have additional protections in place to
protect against the risks of social engineering loss? Do you
have insurance protection for that risk?
CAPTIVE INSURANCE-AN ALTERNATIVE OPTION
All of these challenges have led many commercial clients to
consider whether some form of self-insurance would be more
economical.
A captive can provide customized insurance, risk transfer and
risk management solutions that are specific to the needs of the
company. The captive reduces costs by setting aside premiums in
a loss fund to pay claims. Some of this money could be invested
until it is needed, rather than paying it to a third party. It's possible
the captive could even pay a dividend back to the parent entity,
further reducing the true cost of the program.
In short, if firms can invest capital and take the time to improve
their operational risk management procedures, they can improve
their insurability. They need to control what they can control to
shed the uninsurable label.
" WITH THE HIGH COST OF
BUSINESS INTERRUPTION
AND THE LIABILITY
ASSOCIATED WITH A DATA
BREACH, CYBER INSURANCE
IS NO LONGER OPTIONAL. "
THE ONTARIO BROKER
The Ontario Broker - Volume 22, Issue 5

Table of Contents for the Digital Edition of The Ontario Broker - Volume 22, Issue 5
