What is Cyber Insurance?

Modern businesses are increasingly exposed to sophisticated ransomware attacks, in addition to large-scale data breaches. This increasing risk requires cyber insurance to complement your organization’s financial protection against cyber-related incidents. A report by IBM in 2024 estimates that the average cost of a data breach has risen to $4.88 million. For this reason, cyber insurance needs to be a key component of an overall risk management strategy. Without it, it may be difficult for businesses to recover from incidents and mitigate long-term financial damage.

The following guide will explain the main characteristics of cyber insurance, what it is, why it is important, how it differs from traditional cybersecurity methods, and types of coverage. We then cover the types of threats that cyber insurance insures, how policies work, what affects premiums, and ways to reduce costs. We round off by providing real-world examples of cyber insurance in practice and offer some advice on how to find the right cyber insurance policy for your organization.

What is Cyber Insurance?

Cyber insurance helps organizations by providing financial protection from cyber threats such as data breaches and ransomware. Unlike general liability insurance, which usually focuses its coverage on risks of a physical nature, cyber insurance addresses the financial impacts resulting from digital incidents. It covers a range of expenses, such as legal fees, IT support, and regulatory fines. Additionally, it covers business recovery and legal support, becoming an integral component of the general risk management strategy for any organization.

A 2024 survey reported that more than 59% of businesses cited data breaches as their number one concern, so coverage has become very important. Beyond reducing direct costs, cyber insurance offers resources that help organizations recover, including PR services to manage reputational damage.

Why is Cyber Insurance Important?

Given the increasing complexity of cyber threats with potentially greater financial impacts, cyber insurance has become an increasingly vital component in organizations’ defense strategies. Having cyber insurance in place has become a priority for the reasons listed below.

1. Financial Risk Mitigation: Cyber attacks can lead to significant financial losses due to data breaches, business interruptions, and legal actions. In this regard, cyber insurance mitigates most of these risks because it covers direct and indirect costs associated with customer notification expenses, legal fees, and lost business time. A good cyber insurance policy gives an organization comfort in knowing that when an incident unexpectedly occurs, it is better prepared.
2. Providing Incident Response Resources: One of the greatest benefits of cyber insurance is the immediate access to incident response resources. Most policies offer expert resources like IT forensic analysis and PR services to mitigate damage and control information flow during a response. These are most helpful within the first 48 hours of an incident. The sooner they are deployed, the more damage can be minimized. Proactive insurance support can ensure the most effective and coordinated response with the potential to minimize both short-term and long-term consequences.
3. Supporting Regulatory Compliance: Cyber insurance can also support an organization in meeting all the regulatory compliance demands that come with the business. Almost all policies provide resources to mitigate and address regulatory investigations and other issues related to non-compliance, such as fees and penalties. For more demanding industries, such as financial and healthcare, cyber insurance is necessary to help a business adapt well to regulatory challenges. For instance, insurance covers the legal services involved in navigating complex regulatory environments, including compliance in areas such as GDPR and HIPAA.
4. Reputation Protection: Bad publicity over the reputation of the company caused by a cyber incident has damaged several companies through the loss of customers’, partners’, and even investors’ trust. Most firms with cyber insurance coverage include public relations and crisis management services as part of that insurance policy. It is usually intended to ensure minimal reputational damage while responding to stakeholders before and after a cyber incident. As revealed by a report, 66 percent of consumers in the U.S. said that they could not trust a company that fell victim to a data breach, emphasizing the importance of swift and effective response strategies.
5. Business Continuity Assurance: Cyber insurance also supports business continuity by covering costs related to business interruptions caused by cyber incidents. Coverage can include income loss, extra expenses to maintain operations, and the costs of restoring disrupted services. This ensures that a cyber incident doesn’t result in prolonged operational halts, helping businesses maintain resilience in challenging times. Continuous business operations are thus quite important to mitigate impacts entirely, ensure minimum discomfort to customers, and resume their businesses quickly.

Cyber Insurance vs Cyber Defense

While cyber insurance and traditional cybersecurity defense are both designed to reduce risk, the difference in their functions stands out. This section explains the difference and shows how the two complement each other in a holistic risk management approach. Both are necessary to develop an all-encompassing security posture.

The table compares cyber defenses and cyber insurance in terms of handling cybersecurity risks. Cyber defenses focus on preventing attacks and require upfront investment, with continuous maintenance such as updates and monitoring. These are proactive, aiming to mitigate technological risks before an incident occurs. Cyber insurance provides financial compensation after an incident and supports recovery efforts. It involves ongoing premium payments, which help with costs related to legal liabilities and expert consultations post-incident.

Implementing cyber defenses can take time, depending on how complex the system is. Securing cyber insurance is usually faster after the policy terms are agreed upon. Cyber defenses do not present direct financial recovery but try to prevent losses by preventing incidents. On the other hand, cyber insurance provides post-incident financial recovery since it covers post-incident costs. Cyber defenses and insurance together form a full strategy, defenses address prevention, while insurance tackles financial loss.

Key Types of Cyber Insurance Coverage

Cyber insurance policies take many shapes and forms depending on the needs of an organization. The following pages introduce some key types of coverage that are generally included.

1. First-Party Coverage: Re-establishment of direct losses to the insured through first-party coverage is facilitated. This refers to the direct costs in the form of data retrieval expenses, lost income, legal fees, and notification expenses in informing affected customers. Direct financial cushioning enables organizations to deal with the short-term consequences of cyber occurrences without depleting cash reserves.
2. Third-Party Liability: This type of coverage involves third-party claims. These could be customers or even business partners who fell victim to a cyber incident caused by the policyholder. This coverage includes charges associated with lawsuits, fees for settlements, and awarded damages. Third-party liability insurance is most important for firms dealing with sensitive customer information, such as health data or financial records.
3. Business Interruption Coverage: Business interruption coverage pays for income lost and extra expenses incurred during the time that the business was impacted by a cyberattack. This ensures the financial loss is limited in the time it takes to get systems back up. Such coverage is needed if the business remains constantly online, like in the case of e-commerce or cloud-based services.
4. Network Security Coverage: Liability cover against data breaches and network failures is included. It can protect against security failures. Defense costs, settlements, and judgments due to claims over leakages of confidential information are covered under this coverage. For restoration of affected systems during the attack, it will handle the vulnerabilities exploited by remedying the problems on these systems.
5. Ransomware and Cyber Extortion Coverage: Ransomware and cyber extortion coverage allow companies to manage ransom attacks through the financial management of their demands. Such coverage includes paying ransoms, negotiators, and restoration of encrypted data or other costs. Because of the reality that there have been ransomware cases in every corner of the globe, individual coverage of such risks has become essential.
6. Media Liability Coverage: Media liability insurance pays claims arising from risks involved in defamation, copyright, and advertising liability, more so for businesses whose services are in the content-producing digital world. This could involve posting something by a social media user that violates some copyright law and will cause heavy legal fees that are covered under media liability coverage.

Common Cyber Threats Covered by Cyber Insurance

Cyber insurance policies usually provide comprehensive coverage for a range of digital threats. In the following section, we’ll outline several common risks that are commonly addressed by these policies, offering businesses financial protection against cyber-related incidents.

1. Ransomware Attacks: Ransomware is one of the most expensive and critical threats because it can affect and hinder business operations. Cyber insurance can reduce the impact by paying ransoms that a business might have to pay, attorney fees, and costs for data recovery. Ransomware now constitutes 75% of all cyber insurance claims, which shows how important insurance coverage has become for businesses.
2. Phishing Scams: Phishing scams trick an organization’s employees into revealing sensitive and crucial information. Cyber insurance can cover the losses in terms of money due to payments made based on fraudulent reasons and will support efforts in corresponding with the stakeholders who were deceived.
3. Data Breaches: Data breaches bring significant financial and reputational damage in the form of illegal access to sensitive information. Insurance can cover costs associated with such things as forensic investigation, customer notifications, or liabilities in litigation. Assuming the average breach cost falls into several million dollars, having a broad threat coverage plan can save businesses.
4. Distributed Denial of Service Attacks: DDoS attacks flood the network with traffic, preventing normal services from functioning. Cyber insurance can help with the income lost during downtime and pays for the expense incurred in mitigating an attack. This form of coverage is useful in businesses where constant uptime is crucial, such as in an e-commerce portal.
5. Insider Threats: Insider threats refer to the malicious activities of employees or contractors. Coverage can extend to financial loss through theft, legal costs, and remediation to secure systems. In many cases, cyber insurance can also provide access to experts who will reduce insider risks through monitoring and policy adjustments.
6. Social Engineering Attacks: Social engineering attacks manipulate individuals to divulge confidential information. Cyber insurance may also cover fraudulent payments made after manipulated communications. Such attacks can be financially devastating, and insurance helps mitigate the immediate losses and indirect costs that may result from investigation and recovery.

How Does Cyber Insurance Work?

This section discusses how cyber insurance policies work from application to the time claims are paid. The information includes setting coverage limits, claims, and the means by which policyholders are assured of their compliance with requirements that would be met upon occurrence.

1. Policy Application and Underwriting: Cyber insurance policies begin with underwriting, whereby the insurers assess and rank the type of risk among the applications. This tends to cover three broad areas: present protective measures, security history by incidents, and general security posture. Companies better placed with extensive cybersecurity frameworks often command lower premiums.
2. Coverage Limit Determination: This coverage is generally determined in consideration of the risk profile of the organization and actual specific needs. Larger organizations with considerable exposure to digital threats require a broad coverage limit, while more compact businesses take relatively smaller and cost-efficient limits with relatively lower payouts and premiums.
3. Incident Reporting: Reporting of a cyber incident should be done directly to the insurer. Real-time reporting will ensure full coverage, but delays may cause more problems in the handling of claims. Some policies also stipulate specific time limits within which incidents must be reported.
4. Research and Verification: When a claim is made, an investigation of the claim is conducted by the insurance company. Third-party forensic experts assess the nature and scope of the incident and check if it falls in accordance with the policy conditions.
5. Claim Payout and Support for Remediation: Once the claim is verified, the insurer will process the payout as defined in the policy terms. This may include financial compensation for recovery costs, legal fees, and loss of business. Most policies provide additional support to resume normal operations.
6. Continuous Risk Assessment Requirements: Most insurance companies require the policyholder to maintain a certain level of cybersecurity included in the coverage agreement. Continuous risk assessments ensure that the insured organization remains compliant and minimizes potential vulnerabilities, thus reducing the chances of future claims.

Understanding Cyber Insurance Premiums and Claims

Cyber insurance premiums can vary significantly based on factors like the size of the organization and its industry. In 2022, premiums in the U.S. increased by 50%, with insurers collecting around USD 7.2 billion. This section will explain what influences premium rates and how claims are typically handled.

1. Industry Risk Level: Industries like finance, healthcare, and retail are more vulnerable to cyber incidents due to the nature of the data they deal with. Therefore, such sectors normally pay higher premiums than others. Insurers consider historical data on breaches in these industries to accurately assess the risk.
2. Security Measures in Place: Firms that have implemented strong security controls and practices pay a lower premium. Security controls such as multi-factor authentication, data encryption, and continuous assessment for vulnerability show a strong commitment to security and thus reduce perceived risk.
3. Claims History: A history of frequent claims can cause the insurer to charge a higher premium, as that would indicate the possibility of future incidents. They could also refuse to renew policies for organizations with multiple claims if the root causes were not addressed properly.
4. Coverage Limit and Deductible: Premium costs are also affected by the coverage limit chosen and the deductible. Higher coverage limits offer more protection but are costlier. Deductibles reduce the premium cost but increase the out-of-pocket expenses if a claim arises.
5. Regulatory Compliance: Compliance with industry requirements, such as GDPR or HIPAA, may have implications on the costs of the premiums. Organizations that can prove they are in compliance with such regulatory obligations are considered relatively low risk and, therefore, will attract cheaper premium costs. Insurers offer competitive prices to businesses that handle compliance risk proactively.

Steps to Lower Cyber Insurance Premiums

One of the most effective ways to lower cyber insurance premiums is by having strong cybersecurity practices in place. This section examines how premiums for your insurance can be reduced by specifically focusing on proactive risk management as a cost savings driver.

1. Improve Security Measures: Premium costs can be reduced by investing in cybersecurity measures such as firewalls, anti-malware solutions, and intrusion detection systems. Insurers reward businesses for installing robust security protocols since such measures reduce the chance of a successful attack.
2. Conduct Regular Security Audits: Regular audits ensure any weaknesses are discovered before they can be exploited. Insurers rate proactive businesses that do frequent security assessments by giving them lower premiums for insurance. Security audits, therefore, prove commitment toward constant improvement in the field of risk management.
3. Implement a Zero Trust Architecture: Zero Trust Architecture (ZTA) operates on the foundation that no user or device is trustworthy by default. Implementing the principles of ZTA will reduce the chances of a successful attack and consequently reduce insurance costs. In the eyes of insurers, ZTA represents an effective approach to reducing network vulnerabilities.
4. Employee Training Programs: Regular training helps staff recognize cybersecurity threats like phishing and social engineering. This reduces attack risks and demonstrates a commitment to reducing human error. Training can also lower insurance premiums by showing risk mitigation efforts. Further, incorporating simulations keeps employees engaged and prepared.
5. Engage with Insurer Risk Assessments: Risk assessments from insurers identify vulnerabilities and suggest targeted improvements. Implementing these suggestions can lower premiums and enhance overall cybersecurity. Insurers view proactive businesses more favorably, offering better policy terms. Regular assessments also keep businesses informed of evolving threats.
6. Implement Multi-Factor Authentication (MFA): MFA adds an additional layer of verification, making it far less likely for unauthorized access to occur. Even when passwords are compromised, MFA greatly strengthens security. A report says that in 80% of the organizations where a Business Email Compromise (BEC) attack occurred, no multi-factor authentication solution existed before their incident. Most insurers reduce premiums for companies who have MFA in place, knowing its impact as a risk-reducer. It’s a simple, essential measure in cybersecurity best practices.

Limitations and Exclusions in Cyber Insurance Policies

Cyber insurance policies often exclude coverage for acts of war, insider threats, or known vulnerabilities. Businesses must understand these exclusions to ensure comprehensive protection.

Supplementary policies may be necessary to fill coverage gaps. Ensuring thorough coverage requires a detailed policy review. Here are some limitations to cyber insurance policies:

1. War and Nation-State Attacks: Most cyber insurance policies do not cover events labeled as acts of war. These are the most risky and unpredictable, causing major losses. Understanding this exclusion is essential in light of increasing geopolitical tensions. Additional strategies may be required to protect against such threats.
2. Insider Malfeasance: Normally, insurance excludes intentional insider actions like sabotage or theft. Insurance often covers accidental breaches caused by insiders but is less likely to cover malicious acts. Businesses should consider internal measures such as user monitoring and may seek additional coverage options for protection against insider threats.
3. Existing Weaknesses: Coverage is usually denied to a business that experienced a breach due to known, previously unpatched vulnerabilities. Adequate patch management and regular vulnerability assessments should be followed to ensure incident coverage in the policy. When these are neglected, a business may experience both cyber threats and denied claims.
4. Fines and Penalties: Cyber insurance does not always cover regulatory fines or penalties. Policies may offer limited coverage, especially for businesses in highly regulated sectors. Companies should review their policies and consider additional coverage. This helps protect against potential regulatory fines or penalties.
5. Downtime Beyond Policy Limits: Cyber insurance often has limits on the downtime covered following a cyber incident. Businesses exceeding these limits are responsible for the additional costs. Understanding these coverage limits is crucial, especially for companies relying on continuous operations. Solid incident response plans can reduce downtime effectively.
6. Software Supply Chain Attacks: Third-party software attacks may not be covered unless specifically stated. A supply chain attack is becoming common because the exploitation of vendors’ software vulnerability is on the rise. Businesses that rely on third-party vendors should ensure to cover this risk. That protection addresses third-party software vulnerabilities.

Real-World Case Studies of Cyber Insurance in Action

This section explores real-world cases that demonstrate how cyber insurance has helped companies recover from cyber incidents. These case studies will provide insights into the successes and challenges of claims, illustrating the effectiveness of cyber insurance in mitigating financial losses.

1. Medidata Solutions (2014): In September 2014, Medidata Solutions suffered a fraudulent loss of about $4.8 million. The firm filed its claim under the cyber insurance policy. This was first denied by Federal Insurance Co., but in July 2017, the federal court ordered that Medidata should be covered for the loss.
2. Medibank (2022): Hackers breached the electronic health and personal data of nearly 3.9 million of Medibank’s Australian customers in late October 2022. Medibank did not have any cyber insurance policy in place and thus had to bear the financial burden of responding to the cyber incident on its own. With the aid of a cyber insurance policy, Medibank could have facilitated financial incident response and reduced the impact of the incident.
3. Sinclair Broadcast Group (2021): Sinclair Broadcast Group fell victim to a ransomware attack in October 2021. All operations at its television stations came to a halt, and losses were estimated at $70 million. The company had layered cyber insurance policies covering $50 million. While a few paid, disputes cropped up with the rest regarding coverage. Sinclair has subsequently taken such insurers to court to recover the outstanding amounts.
4. Beazley and CrowdStrike Outage (2024): A global IT outage linked to CrowdStrike led to severe disruptions in every sector globally in July 2024. The leading cyber insurer, Beazley, experienced potential claims but was said to have minimal exposure due to effective underwriting and risk management strategies. The incident drew attention to the need to have strong cyber insurance frameworks to reduce large-scale cyber risks.
5. Anthem Inc. Data Breach (2015): Anthem Inc. became a victim of a cyber attack in February 2015. Hackers accessed information about around 78.8 million people. It led to severe financial and reputational loss. Anthem’s cyber insurance policy covered the cost spent on incident response, lawyer fees, and expenses to notify the customers. Anthem resolved to pay $115 million in settlement of breach-related lawsuits in 2017.

How to Choose the Right Cyber Insurance Policy

Choosing the best cyber insurance policy depends on the risk profile and coverage needs of your business. In this section, we include specific recommendations for assessing policies and costs, as well as achieving the optimal level of coverage for your organization.

1. Assess Coverage Needs: The first step is to assess the risks in your business depending on the sector and type of data processed. Examine current security programs and determine other areas that need insurance, such as data backup or third-party risks. This means that your policy will not be developed to protect you against issues that do not pose a significant risk.
2. Know What Your Insurance Covers: Be cautious around policy limits and exceptions when it comes to the major risks. For instance, some policies may have exclusions that do not allow coverage for insider threats or nation-state attacks. Knowing these gaps can help you gain more coverage so you will not encounter challenges in claims processes.
3. Evaluate Company Reputation: Get to know insurers’ reputations by reviewing their past records of handling insurance claims and their customers’ feedback. Companies that have delivered reliable and efficient claims support are particularly valuable during a crisis. Selecting the right provider can help avoid a lot of time off and just get back on the road to recovery.
4. Balance Cost and Coverage: Compare the cost of the policy to the benefits that are offered. Often, cheaper policies may sound very attractive, but they may put you at more financial risk than you can afford. Prioritize comprehensive coverage over small cost savings to protect your business from future cyber incidents.
5. Consult a Cyber Insurance Broker: It is advisable to seek the service of a broker that deals with cyber insurance as they will assist in explaining policy plans and any existing gaps. It means that brokers can get better conditions and guarantee that you will obtain maximum protection for your enterprise, which makes the choice easier and more rational.
6. Review Claims Support and Customer Service: Make sure the insurer has reliable and easily accessible customer service and claims resolution. The handling of claims can be time-consuming and may determine the whole process of mitigation and recovery in the event of a cyber attack. Inquire about response times and the claims process to make sure you’re backed up when it counts the most.

Conclusion

To sum up, the choice of the appropriate cyber insurance policy helps your company prevent the impact of new and multiple types of cyber threats. Cyber insurance is a solid financial protection that allows recouping expenses, hiring lawyers, and notifying customers after a cyberattack. With the right policy in place, a business owner can avoid interruption or loss of reputation and keep going.

Nonetheless, it is crucial to understand that cyber insurance policies work best in combination with proper cybersecurity solutions. Cyber insurance should not be seen as a stand-alone product but as the final layer added to a strong security structure that includes layered security like multi-factor authentication and Zero Trust Architecture. For businesses looking for an end-to-end security approach, industry specialists such as SentinelOne can offer the best protection with advanced mitigation methods combined with a layer of financial security that will help overcome even the most potent threats. To know more about SentinelOne offerings, contact us now!

FAQs

1. What is cyber insurance?

Cyber insurance, also known as cyber liability, is an insurance coverage specializing in protecting a business against financial loss resulting from cyberattacks and data breaches or other internet-type exposures. These organizations need to prepare for recovery costs, as standard commercial liability policies do not offer such coverage. This insurance may even cover expenses in relation to data recovery, legal fees, crisis management, and even regulatory fines.

2. Do I need cyber insurance?

You should consider cyber insurance if your business, during its operations, uses any form of tech storage or transmission for sensitive business information, such as customer information, employee data, or financial records. Cyber insurance can save you from devastating attacks against your business with average costs extending into millions of dollars. This is particularly the case for small businesses that may not have enough capacity to fall back on in the event of an attack without proper insurance coverage.

3. How does Cyber Insurance Support Regulatory Compliance?

Cyber insurance helps businesses meet most of the requirements related to protecting and safeguarding data with privacy. Most of these regulations require companies to take specific measures to protect sensitive information. Cyber insurance can, therefore, be not only a source of financial support in case of a breach but also an incentive to organizations to practice cybersecurity best practices. Such standards may be used by insurers as a condition for coverage, making the organization have a culture of security.

4. Can I replace cybersecurity defense with cyber insurance?

Cyber insurance should not be considered an alternative to adequate cyber security practices. It is because it addresses one’s financial risk from probable losses resulting from those cyber incidents but does not prevent their occurrence. Cyber insurance should supplement your organization’s cybersecurity efforts, not replace them.

5. What risks are covered by a cyber insurance policy?

Cyber insurance typically covers a wide range of risks, but a typical policy will cover the following:

• First-party loss coverage: The direct losses incurred by the organization as a result of the data breach or attack, such as data recovery and business interruption losses.
• Third-party coverage: Legal fees resulting from class action lawsuits filed against it by customers and partners affected by a data breach.
• Crisis management costs: Includes the cost of PR activities to deal with reputational damages once an incident occurs.
• Fines from regulations: Whatever is charged due to non-compliance of data protection laws.

6. How can cyber insurance help businesses?

Cyber insurance can benefit businesses in the following ways:

• It helps reduce financial loss due to a cyber incident since it covers significant costs that may be incurred by the business, allowing the business to recover sooner.
• Most policies provide access to cybersecurity professionals who help react to and recover from an incident.
• Many insurers require the business to comply with set security standards as part of the policy agreement. Cyber insurance protects businesses from regulatory fines and helps facilitate compliance efforts as businesses navigate highly complex legal landscapes.

7. What are some examples of claims covered by cyber insurance?

Examples of claims that may be covered through a cyber insurance policy include the following:

• Hackers could breach your system and steal customer data, which sets off lawsuits from your affected clients
• Ransomware attacks your business, so no critical files are accessible unless a ransom is paid.
• A data breach loses employees’ sensitive information, and the affected will have to be notified along with credit monitoring services.
• A denial-of-service attack shuts down your business operations for days, leading to a loss in income due to the same and other expenses recovered later.