Silent Cyber Exposure Management

The Hidden Cyber Risk Lurking in Insurance Portfolios

In today’s interconnected world, virtually every business faces cyber risk, regardless of industry or size. While dedicated cyber insurance has emerged as a critical tool for managing these exposures, a more insidious problem continues to challenge the insurance industry: silent cyber risk.

Silent cyber—also known as non-affirmative cyber—refers to potential cyber coverage that exists within traditional insurance policies that were never explicitly designed to address digital risks. As organizations and insurers grapple with this complex issue, stakeholders across the insurance ecosystem face significant challenges and opportunities in managing these exposures effectively.

Understanding Silent Cyber: The Scope of the Problem

Traditional insurance policies—including property, general liability, errors and omissions, crime, directors and officers coverage—were developed mainly before cyber risks became a significant concern. These policies typically contain broad insuring agreements that may unintentionally cover cyber-related losses despite not explicitly addressing them.

Consider these scenarios:

• A manufacturing company experiences a cyber attack that causes its industrial control systems to malfunction, resulting in physical damage to equipment. Is this covered under traditional property insurance?
• A retailer suffers a data breach exposing customer information. Customers filed a class-action lawsuit. Does the commercial general liability policy respond?
• A company’s financial controls are compromised through a business email compromise attack, resulting in fraudulent funds transfers. Will the crime policy cover these losses?

The answers to these questions often depend on specific policy language, jurisdiction, and claim circumstances—creating significant uncertainty for both insurers and policyholders.

Regulatory Pressure Driving Change

Regulators worldwide have increasingly focused on silent cyber exposure, recognizing its potential to create systemic risk and unexpected losses:

• The UK’s Prudential Regulation Authority (PRA) issued supervisory statements requiring insurers to develop action plans for addressing non-affirmative cyber risk.
• The European Insurance and Occupational Pensions Authority (EIOPA) published guidelines on information and communication technology security and governance, including silent cyber considerations.
• The National Association of Insurance Commissioners (NAIC) in the U.S. continues to develop frameworks for cyber risk management that address non-affirmative exposures.

These regulatory initiatives have accelerated insurers’ efforts to identify, quantify, and address silent cyber exposures across their portfolios.

Insurer Strategies: Creating Clarity Through Affirmation or Exclusion

Insurers have primarily adopted two approaches to address silent cyber risk:

1. Exclusion Strategy

Many insurers have implemented broad cyber exclusions across traditional policy lines, explicitly removing coverage for losses arising from cyber incidents. This approach creates clarity but may leave policyholders with significant coverage gaps unless they purchase standalone cyber insurance.

Common exclusion endorsements include:

• CL380: A London market clause excluding computer hacking and viruses
• LMA5240: Excluding cyber loss from property policies
• LMA5400: Addressing cyber incidents in liability policies
• NMA2914/2915: Excluding electronic data from property coverage

These exclusions vary significantly in scope and application, creating challenges for policyholders with multinational insurance programs or coverage placed across multiple markets.

2. Affirmation Strategy

Some insurers have affirmatively granted limited cyber coverage within traditional policies, explicitly defining what cyber perils are covered and to what extent. This approach reduces ambiguity while providing policyholders with baseline protection for certain cyber scenarios.

Affirmative coverage often includes:

• Limited coverage for physical damage resulting from cyber incidents in property policies
• Defined coverage for bodily injury and property damage arising from cyber events in liability policies
• Specified sub-limits for particular cyber scenarios relevant to the primary coverage

This approach allows insurers to explicitly price for the cyber exposure while giving policyholders transparency about their coverage.

Reinsurers: Driving Clarity and Discipline

Reinsurers have been particularly active in addressing silent cyber risk, often pushing primary insurers to clarify cyber exposures before providing reinsurance capacity. Key reinsurer initiatives include:

• Requiring clients to implement robust silent cyber management frameworks
• Demanding transparent reporting on potential cyber accumulation across portfolios
• Imposing contractual terms requiring resolution of ambiguous cyber language
• Developing modeling tools to help clients quantify potential silent cyber exposures
• Restricting coverage for non-affirmative cyber in proportional and non-proportional treaties

As major reinsurers establish stricter guidelines for silent cyber, primary insurers face increasing pressure to address these exposures systematically across their business lines.

Commercial Clients: Navigating a Changing Coverage Landscape

For commercial insurance buyers, the silent cyber resolution creates both challenges and opportunities:

Coverage Gaps

As insurers implement cyber exclusions across traditional policies, organizations may discover new coverage gaps for scenarios that previously might have been covered. For example, a cyber-induced fire might have clearly fallen under property coverage previously but may now require both property and cyber policies to achieve complete protection.

Integration Challenges

Organizations with both standalone cyber insurance and traditional policies face complex integration challenges, particularly around claims that could trigger multiple policies. Issues like deductible application, primary/excess determinations, and coverage sequencing require careful attention.

Risk Management Implications

Clarifying cyber coverage necessitates more sophisticated risk management approaches that cross traditional organizational boundaries. IT, legal, risk management, and treasury teams must collaborate to understand cyber events’ technical and insurance implications.

Contract Certainty Benefits

Despite these challenges, the move toward clarity ultimately benefits policyholders by providing greater certainty about what is and isn’t covered. This transparency enables more informed decisions about risk transfer versus risk retention.

Rating Agency Perspective: Evaluating Insurer Discipline

Rating agencies have increasingly incorporated silent cyber management into evaluating insurers’ enterprise risk management capabilities. Key areas of focus include:

• Governance structures for identifying and managing non-affirmative cyber exposures
• Underwriting controls to limit unintended cyber accumulation
• Data collection and reporting capabilities related to cyber exposure
• Stress testing and scenario analysis across policy portfolios
• Clear communication strategies with policyholders regarding cyber coverage

Insurers with robust silent cyber management frameworks often receive more favorable treatment in rating assessments, creating additional incentives to address these exposures proactively.

Best Practices for Stakeholders

For Insurers

1. Develop a comprehensive inventory of potential silent cyber exposures across all lines of business
2. Implement consistent policy language addressing cyber risk across the portfolio
3. Enhance underwriting guidelines to evaluate cyber exposures even in traditional lines
4. Create cross-functional teams spanning underwriting, claims, legal, and actuarial to address cyber exposures holistically
5. Invest in data capabilities to track and monitor cyber risk accumulation

For Reinsurers

1. Establish clear cedent guidelines for acceptable approaches to silent cyber
2. Develop modeling capabilities to evaluate potential accumulation scenarios
3. Provide technical support to clients implementing silent cyber management frameworks
4. Ensure treaty language clearly addresses cyber exposures
5. Consider innovative structures to address systemic cyber risk

For Commercial Clients

1. Conduct comprehensive policy reviews focused explicitly on cyber coverage
2. Engage with brokers who specialize in both cyber and traditional coverage lines
3. Develop claims roadmaps for cyber scenarios that could trigger multiple policies
4. Prioritize insurers offering clarity in coverage over ambiguity
5. Consider manuscript endorsements to address specific cyber-physical scenarios relevant to your operations

The Future of Silent Cyber Management

As the industry continues to address silent cyber risk, several trends are emerging:

• Greater standardization of cyber exclusions and affirmative grants across markets
• Enhanced data collection, enabling more sophisticated modeling of cyber exposure
• Increased collaboration between cyber underwriters and traditional lines
• Development of hybrid products that address cyber and physical risk together
• More nuanced regulatory frameworks balancing clarity with coverage availability

While significant progress has been made, completely eliminating silent cyber exposure remains a long-term challenge requiring sustained focus from all stakeholders.

Conclusion

Silent cyber exposure represents one of the most significant challenges facing the insurance industry today. As digital risks increasingly intersect with physical exposures, traditional policy structures must evolve to provide clarity and certainty for both insurers and policyholders.

By taking proactive steps to identify, quantify, and address non-affirmative exposures, stakeholders across the insurance ecosystem can transform this challenge into an opportunity to create more resilient risk transfer mechanisms fit for our increasingly digital world. The journey toward fully resolving silent cyber risk will be long and complex, but its clarity will strengthen the insurance industry’s ability to fulfill its fundamental promise: delivering certainty in an uncertain world.