The increasing frequency and complexity of cyberattacks have led to a surge in demand for cyber insurance among organizations. However, as insurers evaluate the risks of offering such policies, they are increasingly concerned about the viability of their business in the event of a large-scale cyberattack that affects a significant number of policyholders. This has led to growing uncertainty around coverage and exclusions, which could expose insurance customers and companies to significant risk in the absence of alternative options for mitigation or transfer.
To address this issue, insurance and government leaders are exploring various tools to make cyber insurance more sustainable and to address the systemic risk associated with catastrophic cyberattacks. The Biden Administration’s National Cybersecurity Strategy has suggested the possible implementation of a federal cyber-insurance backstop – a government-backed program that would provide financial aid to stabilize the economy in the event of a catastrophic cyber incident. Under this program, private insurers would be required to meet certain requirements to qualify for federal support.
A well-designed federal cyber-insurance backstop has the potential to enforce better safety, put more capital into the market, reduce litigation risk, and centralize a consistent approach to risk management. For instance, insurers could adhere to defined underwriting criteria that would hold policyholders to certain standards of cybersecurity hygiene, reducing the likelihood of a catastrophic event. Insurers could also explicitly cover widespread events and put more capital into the cyber-insurance market in preparation for a catastrophe. Moreover, a federal backstop could provide increased coverage clarity, reducing litigation risk and preventing costly legal battles over unclear coverage in the event of a cyberattack.
However, implementing a federal backstop cannot be done in a vacuum. A collaborative effort between cybersecurity experts, insurers, and the government is necessary to design a program that considers the nuances and complexities of the evolving cyber-threat landscape. Nevertheless, a federal cyber-insurance backstop represents a significant step forward in making cyber insurance a viable option for corporations and promoting cybersecurity practices industry-wide.
In conclusion, the growing demand for cyber insurance among organizations has prompted increasing concerns among insurers about their viability in the event of catastrophic cyberattacks that affect a large number of policyholders. The implementation of a federal cyber-insurance backstop could address this issue by transferring remote but potentially catastrophic risks from qualifying insurers to the federal government. While the specifics of such a program remain to be determined, a well-designed federal backstop could enhance the effectiveness of cyber insurance, promote better cybersecurity practices, and build resilience as a society.