In this series, Grace Crickette provides C-Level executives a comprehensive overview of cyber insurance, while addressing business impacts and offering best practices for implementing a risk-management strategy that includes a cyber-liability policy.
Part Two: A Very Brief History of Insurance and Coffee Houses
Coffee houses or cafés have served as centers of social interaction for patrons to access the Internet on their laptops, write novels, and launch startups over a cup of coffee, and the café lifestyle is not a new idea. It has been around for a very long time.
Let’s travel back to the City of London in 1675, where we find a coffee house on every corner, over 80 to choose from within one square mile. You are a daring entrepreneur whose family owns a clothing mill and you want to import cotton from the new world.
You have made a deal with a shipper, the Sinkability, but you’re concerned about the abilities of the captain and crew, the worthiness of the ship, the weather across the Atlantic, and oh ye maties the dreaded pirates. If the ship loaded with cotton or later with the cloth from your mill is sunk, your family’s fortune will be lost and you wind up in debtor’s prison!
Luckily, you are headed to Lloyd’s coffee house where you have heard that they not only provide a nice espresso, but a venue for merchants and shippers to discuss deals and pool their money to cover a portion of each other’s potential losses. The patrons are not just sharing a cup of coffee – they are sharing risk. You are now a seventeenth century Risk Manager!
Today Lloyd’s Coffee house is Lloyd’s of London, which is unlike any other market place for insurance. I encourage you to visit the Lloyd’s website to not only learn of its amazing history, but to learn about the innovation that is going on in that market place, including the insuring of information technology and data risks. More: https://www.Lloyd’s.com/Lloyd’s/about-us/history
Putting on my risk manager hat, I can tell you that Lloyd’s has a stellar reputation for covering claims, and while I may have had to work hard to prove my case a time or two, in the end the syndicates that insured my program always came through, just as they did in the great earthquake of 1906.
The head of Lloyd’s visits San Francisco every year to commemorate the great earthquake of 1906 and remember how Lloyd’s responded to the losses by declaring that “every claim shall be paid.”
During this era, governments were not expected to supply relief funds, so the burden of losses fell on the insurance industry. This resulted in great loss to the Lloyd’s market, but also the birth of a new idea, reinsurance.
What about insurance in America?
“An Ounce of Prevention is worth a Pound of Cure,” Benjamin Franklin.
We can thank Benjamin Franklin for being practical and inventive. In 1752, he started the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire, which became the first mutual fire insurance company in America.
The Philadelphia Contributionship for the Insurance of Houses from Loss by Fire set new standards for building houses because it refused to insure houses that were considered fire hazards. This criteria, also known as underwriting, was used to evaluate buildings and became the foundation for building codes and zoning laws. Seven years later, Franklin was also instrumental in getting the first life insurance company, the Presbyterian Ministers’ Fund, off the ground.
Insurance in the U.S. differs in many ways from Lloyd’s, but in short: In the US corporations create and sell insurance products. The insurance laws in the US are governed by state law, so the regulations are fragmented. Most policies purchased are not customized with wording, rather standard insurance policies are provided and then altered through exclusions and endorsement, though there are some carriers that allow greater flexibility.
In the U.S., there is tremendous capacity and pricing is very competitive. This is absolutely not a complete summation of the contrast between Lloyd’s and the rest of the insurance world. There will be plenty of time to dive in deeper as we continue The CISO’s Guide to Insurance.
If you would like to comment or contribute additional information on this topic, please comment below or email Grace at grace.crickette@hanoverstonepartners.com
Dictionary
Capacity: The amount an insurer can insure, which is limited by financial strength, regulations, debt covenants and other factors. All insurance companies or syndicates have limited capacity. I recall a meeting with an underwriter on fine arts at the end of a long day. He sat down and immediately stated: “I’m done, not going to write any more fine arts coverage this year!”
Reinsurance: Protects an insurer in circumstances when large individual claims or large numbers of smaller claims as a result of a catastrophe or other unforeseen circumstance threatened to cause catastrophe for the insurance companies own balance sheets.
Think of it as insurance for insurance companies. Reinsurance involves underwriters sharing out parts of their risk portfolios so that the risk can be more equally shared – far better for insurers, and for claimants. Upon creation, excess of loss reinsurance provided a new way of apportioning risk between reinsurers and is widely used.
Syndicate: A self-organizing group of individuals, companies, corporations or entities formed to transact some specific business, to pursue or promote a shared interest. In most cases formed groups aim to scale up their profits.
Unlike many other insurance brands, Lloyd’s is not a company; it’s a market where members join together as syndicates to insure risk. Much of Lloyd’s business works by subscription, where more than one syndicate takes a share of the same risk. Business is conducted face-to-face between brokers and underwriters in the Underwriting Room.
Wording: The wording or written language in the insurance policy itself is intended to provide protection for the insurance company and to eliminate loopholes in coverage. Policy wording is open to interpretation by the courts.
There are even “wording specialists” employed by the carriers. It is good to take the time and meet with the wording specialists as they can be extremely helpful in crafting the language that you desire and in establishing a clear understanding between you and the carrier.
Keep in mind that ambiguity in an insurance policy is not always a bad thing. In many jurisdictions if the language is ambiguous then the court, as a matter of law, will rule in favor of the insured and not the insurance company.
Underwriting: The process of gathering information about an insured, its industry, region, and other factors, along with using modeling of data to understand the risk and develop the appropriate premium to cover the expected losses that might arise from that risk. Insurance underwriters evaluate the risk and exposures of potential clients or insured’s and then make a decision whether they want provide coverage and how much.