Cyber Insurance Explained: Cost, Benefits, Coverage & More | StrongDM (2024)

Cyber insurance has gained a lot of attention recently as an emerging and fast-growing market amidst increasing cyber threats. But it’s actually been around for over 20 years. The first iteration of cyber insurance was created in 1997 by Steven Haase, who was working for an insurance agency focused on insuring technology companies. Several of his clients, including a large network security company, were early internet adopters and needed help protecting their data online.

After searching the marketplace, Haase found that agencies were reluctant to take on the risk. Cyber exposure was so new that there weren’t any methodologies in place for loss prevention. However, he got lucky when he met with a friend at AIG who was looking to create a new product line. Together, they created the Internet Security Liability Policy—the first cyber risk policy. Within a few years, the global cybersecurity insurance market emerged.

Today, cyber insurance is one of the fastest growing lines of business in the insurance industry, and the market is expected to reach $29.2 billion by 2027. But how did it get here?

Initially, cyber insurance policies were add-ons to traditional liability coverage for companies in the tech and security industries. Typically, these products only covered third-party liabilities—such as losses to the business’s clients. However, by the early 2000s, cyber insurance brokers began offering first-party coverage as well, which provided protection for losses to the businesses themselves.

By the mid-2000s, growing cyber risks and high-profile breaches led to increased demand for cybersecurity insurance coverage for all businesses—not just those in the tech space. As a result, more insurance agencies started offering cyber insurance as a standalone product.

Then, in 2020, the COVID-19 pandemic forced many organizations to operate remotely, leading to widespread use of mobile devices, remote access to business systems, and migration to the cloud. While remote work had many advantages for businesses and employees alike, this transition dramatically increased the threat landscape and drove home the need for more cyber risk mitigation strategies like cyber insurance.

Cyber attacks have grown exponentially in recent years, causing billions of dollars in losses and damages. In fact, cyber threat is now seen as the top risk to business in seven out of eight countries surveyed—ahead of the pandemic, economic downturn, and skills shortages.

If a business faces a significant data breach or cyber attack, it may struggle to recover without additional support and resources. After all, most businesses operate on relatively lean day-to-day budgets, and with the average global cost of a data breach totaling $4.35 million, it’s easy to see how just one cyber attack could devastate a company.

Cyber insurance plays a critical role in mitigating these growing risks for businesses, particularly as more and more organizations migrate to the cloud and support remote workers.

Financial protection isn’t the only reason more companies are turning to cyber insurance. Government and international regulations and standards in cybersecurity are also incentivizing cyber insurance uptake. As regulatory mandates increase, organizations are relying on cyber insurance to help fill in the gaps in their coverage and improve compliance across the board.

For example, privacy laws such as the U.S. Health Insurance Portability and Accountability Act (HIPAA) and the European Union’s General Data Protection Regulation (GDPR) impose strict standards for the handling and securing of private data—with steep penalties for those found non-compliant.

In March 2022, the Cyber Incident Reporting for Critical Infrastructure Act (CIRCIA) was signed into law. It will require critical infrastructure companies to report cybersecurity incidents to the Cybersecurity and Infrastructure Security Agency (CISA). Additionally, the U.S. Securities and Exchange Commission (SEC) proposed a rule in March 2022 requiring publicly listed companies to report cybersecurity incidents, their cybersecurity capabilities, and their board’s cybersecurity expertise and oversight.

Regulations like these motivate companies to protect themselves from potential breaches that could carry the additional costs of regulatory fines and damages, on top of business losses.

The number one reason businesses invest in cyber attack insurance is to address concerns about data security. But cyber insurance also helps companies address existing threats and vulnerabilities, achieve or maintain regulatory compliance, and secure customer-facing services and applications as part of a comprehensive risk management program.

Some of the main benefits of cyber insurance include:

The cyber insurance landscape is rapidly evolving. Despite the growing demand for cyber insurance (and in some ways because of it), cyber insurance presents several challenges for insurers and customers alike.

With the massive spike in cybersecurity incidents in recent years, demand has never been higher for cyber coverage. But with soaring cyber costs—and the potential for catastrophic financial damages in large-scale attacks—many insurers are re-evaluating their own exposure to these losses, imposing higher premiums and more limitations on coverage.

Rising costs are not the only concern though. Compared to traditional insurance products, cyber security insurance coverage can vary widely between providers. Cyber insurance is not yet standardized across the industry because it is a relatively new product. Each insurer has its own policy form and language, which can lead to confusion for customers trying to compare their options or understand what is actually covered.

To understand cyber insurance, it’s important to delineate between the two main types of data breach insurance coverage: first-party coverage and third-party liability.

First-party cyber coverage ​​protects the company from direct losses due to a data breach or attack, including employee and customer information.

Third-party cyber coverage protects the company from liability when a customer, partner, vendor, or other party sues following a breach.

Specific insurance policies will provide coverage that falls under one or both of these types of insurance. More on this later.

Cyber insurance works much like traditional liability insurance. Insurers offer various policies designed to cover common cyber risks, liabilities, and associated costs. However, cyber risk is difficult for insurance companies to quantify as it can vary so broadly between businesses and industries. So, often cybersecurity insurance companies will work more closely with the business during the underwriting process to identify coverage needs as well as existing compliance efforts.

For example, many insurers will want to see what policies and security measures are already in place to reduce cyber risk. Depending on the maturity of the cybersecurity program, the insurer may require certain security steps or standards before agreeing to cover the business.

Since virtually all businesses have a digital component to their operations, cybersecurity is an important consideration for any company. Most companies will likely need first-party protection of their direct assets. But many businesses in the information technology industry could benefit from additional third-party coverage as well.

These businesses can include:

Cyber insurance policies protect businesses against financial losses, system damages, and network security and liability due to a cyber attack or data breach.

Here’s what to look for in cyber insurance coverage:

First-party coverage against losses, such as data destruction, extortion, theft, hacking, and denial of service attacks.

This typically includes coverage for costs related to:

For example, if a business’s website is hacked and customer credit card info is stolen, first-party cyber insurance can pay for expenses like credit monitoring, customer notification, and public relations campaigns to manage the reputational fallout.

Third-party liability coverage, which protects businesses from third-party claims against them. Coverage can include losses caused by errors and omissions, failure to safeguard data, or defamation. Cyber liability insurance is especially important for businesses that are responsible for their clients’ data and online security.

For instance, if an IT company’s client has a ransomware attack, the insurance policy can protect the IT company from losses if that client sues.

A third-party liability policy can cover expenses such as:

Only 43% of businesses feel financially prepared to face a cyber-attack.

Businesses must adopt better security postures in order to access cyber insurance policies. StrongDM’s comprehensive Infrastructure Access Platform enables companies to streamline access management while implementing best-practice security policies. This includes endpoint detection and response (EDR), multi-factor authentication (MFA) network access, data encryption and protection, regular backups, and audits.

With StrongDM, you can make sure that the right people have the right access to your most sensitive information at the right time—helping your business meet regulatory compliance standards and reduce cyber risks so you can qualify for the best cyber insurance policies.

Get started today with StrongDM.