The recent debacle involving CrowdStrike’s Falcon Sensor software, which caused a global system failure and widespread internet disruptions, initially had many fearing a financial catastrophe for the insurance industry. However, a recent analysis by Fitch Ratings paints a less dire picture than initially anticipated.

Limited Financial Impact for Insurers

According to Fitch Ratings, the impact on the insurance and reinsurance sectors may be less severe than initially feared. Their report estimates that the total insured losses from this incident will likely fall within the mid-to-high single-digit billion-dollar range. This estimate reflects a more moderate impact compared to earlier predictions, largely because most of the claims will be managed by primary insurers rather than requiring significant involvement from the reinsurance market.

This news offers a much-needed sigh of relief for insurers and stakeholders who were anxious about the financial repercussions of the CrowdStrike glitch. While the disruption was significant—affecting major industries like aviation, banking, and healthcare—Fitch’s analysis suggests that the industry is well-positioned to absorb the financial impact without facing major difficulties.

Understanding Coverage Gaps in Cyber Insurance

The CrowdStrike incident has underscored a critical limitation in current cyber insurance policies. While these policies generally cover downtime resulting from operational failures or security breaches within the insured’s own systems, they often exclude disruptions caused by non-malicious events at third-party vendors. This was the case with the CrowdStrike update, which affected computers running Microsoft’s Windows operating system but did not involve malicious intent.

Loretta Worters from the Insurance Information Institute elaborates on this point, saying, “Standard cyber insurance typically does not cover downtime due to non-malicious cyber events at third-party network service providers.” This coverage gap is an important factor in assessing the potential claims arising from the CrowdStrike incident.

Adapting to the Evolving Cyber Risk Landscape

Despite the challenges brought to light by this incident, Fitch Ratings highlights that the insurance industry is actively working to adapt to the evolving landscape of cyber threats. The CrowdStrike glitch underscores the difficulty of accurately assessing and accounting for cyber risks. As cyber threats continue to evolve, there is a clear need for ongoing updates to insurance frameworks to address these emerging risks more effectively.

The Road Ahead: Lessons Learned

The CrowdStrike glitch serves as a crucial learning moment for both insurers and businesses. Here are some key takeaways:

• For Insurers:
  • Strengthening Cyber Risk Assessment: Insurers need to enhance their methodologies for assessing cyber risk to better account for disruptions at third-party vendors.
  • Developing New Coverage Options: The industry should consider creating new cyber insurance products that specifically cover non-malicious outages caused by third-party providers to meet the changing needs of businesses.
• For Businesses:
  • Understanding Coverage Limits: Companies should carefully review their existing cyber insurance policies to understand their coverage limitations, especially concerning disruptions caused by third-party vendors.
  • Diversifying Vendor Reliance: Spreading critical operations across multiple vendors can help mitigate the risks associated with relying on a single service provider.

Conclusion

Although the CrowdStrike glitch was disruptive, its financial impact on the insurance industry appears to be less severe than initially feared. However, it has highlighted significant gaps in cyber insurance coverage and stressed the importance of adapting to the evolving cyber risk landscape. By refining risk assessment models, developing new coverage options, and strategically managing vendor relationships, the insurance industry can improve its resilience against future cyber disruptions and better protect businesses.

Additional Considerations:

• The long-term effects of the CrowdStrike incident on business continuity plans and cybersecurity protocols remain to be seen. Companies may reassess their dependence on specific software providers and invest in more robust contingency strategies to minimize downtime during future incidents.
• Regulatory bodies may also play a role in shaping the future of cyber insurance. They could potentially introduce guidelines or standards to encourage the development of more comprehensive cyber insurance coverage options.

photo source: Google

By: Montel Kamau

Serrari Financial Analyst

23rd July, 2024