Why Banks Need Comprehensive Cyber Insurance Coverage

Banks and financial institutions handle sensitive customer data and financial assets that make them prime targets for cybercriminals. As cyber threats continue to rise, banks need robust cybersecurity measures along with comprehensive cyber insurance to mitigate risks.

Cyber insurance provides financial protection and resources to manage the fallout from data breaches, hacking incidents, malware attacks, and other cyber events. With cyberattacks on the financial sector surging, cyber insurance has become a necessity rather than an option for banks.

The Growing Threat of Cyber Attacks Facing Banks

Banks face a rapidly evolving threat landscape with sophisticated cybercriminals continuously honing their skills and developing new attack vectors. As per the 2022 Identity Theft Resource Center report, the finance and insurance sector witnessed a 1,144% spike in data breaches compared to 2020.

Phishing, ransomware, ATM jackpotting, card skimming, and DDoS attacks are some of the most common cyber threats banks deal with. A 2022 survey by the American Bankers Association found that 73% of bankers feel vulnerabilities to cyber threats have increased over the last few years.

With troves of sensitive customer data and financial assets at stake, banks are an attractive target for threat actors ranging from fraudsters to nation-state hackers. As banks expand their digital footprint, their attack surface also widens. Legacy systems, third-party vendors, and remote workers also introduce additional risks.

Why Cyber Insurance is a Must-Have for Banks

Cyber insurance has shifted from a "nice-to-have" to a necessity for banks to hedge risks in today's threat landscape. Here are some key reasons why banks need cyber insurance coverage:

Financial Protection from Cyber Incident Fallout

The costs from a cyber incident can pile up quickly, from computer forensics to legal expenditures, fines, and potential lawsuits. The Accenture 2022 Cost of Cybercrime Study pegs the average cost of a data breach in financial services at $5.72 million.

Cyber insurance helps banks cover first-party losses like data recovery, lost income from business disruptions, and extortion payments. Policies also protect against third-party liabilities like legal settlements with customers or regulatory penalties.

Access to Expert Incident Response Services

Most cyber insurance policies include access to pre-screened forensic investigators, crisis management PR firms, lawyers and compliance specialists to assist with response and recovery from an attack. This can help banks notify customers quickly, resume operations faster and comply with breach disclosure laws.

Maintaining Consumer Trust After an Attack

Banks depend on customer trust more than most other industries. According to FICO, close to 20% of customers switch banks after a data breach. Cyber insurance helps banks demonstrate their commitment to security and provides resources for reputation management after an incident. This is key to retaining customer relationships.

Adhering to Expanding Regulations

Regulators are increasingly mandating cyber insurance coverage as threats mount. In November 2021, New York State issued new cybersecurity rules requiring financial services firms to carry specific cyber insurance policies. Banks without adequate coverage risk significant penalties.

Key Types of Cyber Insurance Coverage for Banks

Cyber insurance policies available for banks typically package various types of first-party and third-party coverage:

First-Party Cyber Insurance Coverages

First-party coverage protects the policyholder against losses they incur themselves as a result of a cyber incident. Here are some common first-party coverages for banks:

• Data Restoration: Covers costs of recovering and restoring data lost or damaged in a cyberattack.
• Business Interruption: Reimburses income lost while operations are disrupted after an attack. Extortion payments may also be covered.
• Cyber Extortion: Provides coverage for ransom payments and negotiation services in the event of a ransomware attack.
• Computer Forensic Investigations: Covers costs of a forensic analysis to determine the cause and scope of an incident.
• Customer Notification Expenses: Pays for services to notify customers of a data breach as required by regulations.
• Reputation Management: Provides access to crisis management services to mitigate reputational damage after an attack.

Third-Party Cyber Insurance Coverages

Third-party coverages pay for liabilities arising when a cyber incident affects other entities like customers. Common third-party coverages include:

• Customer Data Breach Liability: Covers legal settlements, judgments and defense costs if customers sue the bank over a data breach.
• Regulatory Fines and Penalties: Provides coverage for fines imposed by regulatory bodies for non-compliance with laws like GDPR as a result of a cyber incident.
• Payment Card Liabilities: Covers costs associated with credit card breach notifications, assessments and fraudulent transactions.
• Cyber Media Liability: Protects against copyright infringement, libel, and plagiarism claims stemming from online content.
• Funds Transfer Fraud: Covers direct losses from fraudulent transfer of funds out of customer accounts.

Top Cyber Insurance Providers for Banks

Specialized insurance carriers offer customized cyber risk solutions tailored for banks and financial institutions. Here are some leading options:

United Bankers' Agency

Minnesota-based United Bankers’ Agency caters specifically to the insurance needs of community banks across the nation. Their cyber insurance covers data and security breaches, cyber extortion threats and fraudulent fund transfers. Policyholders get access to eRisk Hub resources for cybersecurity training.

Chubb

Chubb is one of the largest property and casualty insurers with dedicated cyber insurance solutions for financial institutions. Their customizable policies cover damages and liabilities from data breaches, business interruptions, cyber crimes and technological failures.

AIG

AIG offers specialized cyber insurance for the financial services sector combining risk analysis, proactive loss mitigation and post-incident services. Their policies protect against cyber threats, technology errors and crime losses. Value-added services include risk management tools, loss prevention training, and breach coaches.

Coalition

Backed by leading cybersecurity venture capital firms, Coalition provides cyber insurance paired with proactive security tools and services. Their solutions for banks cover costs associated with ransomware, wire transfer fraud, cyber extortion and breaches. Policyholders get access to security technology and resources.

Why Cyber Insurance is Vital for Community Banks

Small community banks with limited IT budgets can be particularly vulnerable to financially devastating cyber incidents. Cyber insurance can serve as a safety net to keep these banks solvent if attacked.

Key reasons community banks need cyber insurance include:

• Protect customer assets and data, which underpins community bank reputations.
• Ensure compliance with regulations as state and federal watchdogs turn their focus to community bank cybersecurity.
• Access response services community banks cannot afford in-house, including forensic experts, crisis PR firms and breach counsel.
• Survive financially if hit with a costly ransomware or data breach incident.

By partnering with insurers like United Bankers Agency that specialize in community bank solutions, smaller banks can safeguard their futures even as the threat landscape evolves.

The Multifold Benefits of Cyber Insurance for Banks

Beyond just financial protections, a strong cyber insurance policy provides banks with a range of advantages that directly or indirectly enhance their security postures.

Incident Response and Recovery Support

Having access to vetted third-party specialists allows banks to respond to and recover from cyber incidents much more smoothly. Insurer-recommended lawyers, forensics firms, crisis communicators and breach coaches have extensive experience assisting policyholders navigate breach scenarios.

Reinforcing Cybersecurity Defenses

Cyber insurers offer policy discounts for robust security practices and often mandate certain controls. This motivates banks to strengthen their IT infrastructure, cyber hygiene and risk management programs to qualify for and retain coverage.

Regulatory Compliance Assistance

Insurers help banks meet expanding regulations requiring specific cybersecurity measures and cyber insurance coverage. Partnership with a carrier well-versed in the regulatory environment provides banks guidance on staying compliant.

Reputational Protection

Timely communications, customer notifications and public relations support after an incident helps banks maintain customer confidence and protect their brand equity. Cyber insurance facilitates access to these services.

Financial Peace of Mind

Knowing they have reliable coverage in place allows banks to focus resources on serving customers rather than fretting about potential cyber incident bills erasing profits. This peace of mind is invaluable.

Implementing Cyber Insurance Successfully in Banks

Like any other corporate insurance program, realizing the full value of cyber insurance involves more than just purchasing a policy. Banks need to take steps before, during and after inception for optimal coverage.

Choosing the Right Provider

Not all cyber policies are created equal. Banks should partner with carriers that offer comprehensive protection for financial institutions rather than generalist providers. Coverage for bank-specific exposures like wire transfer fraud, ATM crime and payment card liabilities is essential.

Assessing Risks and Coverage Needs

Banks need to undertake a detailed assessment of potential risk exposures considering their business model, IT infrastructure, data assets, and cybersecurity gaps. This allows procuring adequate policy limits across key coverage lines for optimal financial protection.

Tying Coverage to Security Strategy

Policies should complement in-house cybersecurity programs, not serve as a substitute. Banks must implement baseline controls required by insurers as well as go above and beyond to fortify defenses and earn premium incentives.

Managing Policies Proactively

Given rapidly evolving threats, policies and controls, banks should review coverage and compliance regularly rather than buying once and forgetting. Cyber insurance must be integrated into business continuity planning and tested through incident response exercises.

The Bottom Line

Cyber insurance cannot prevent cyberattacks from happening but can mitigate the damage when they do occur. For banks, comprehensive policies that cover financial liabilities, offer loss prevention support, and facilitate expert incident response and reputation management provide a vital layer of protection against the growing threat scape.

As cyber risks become enterprise-wide risks, banks that do not implement adequate safeguards including cyber insurance put their futures in jeopardy. Partnering with experienced carriers and agents to implement policies that align with their specific risks allows banks to tackle today's cyber challenges head-on.