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What Is a Cyber Insurance Risk Assessment?

Updated Jan 23, 2024

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Keeping up with the latest security threats can be a full-time job. Bad actors constantly find new ways to infiltrate company servers, databases and websites. The result is lost data, locked systems and ransoms. Cyber insurance is essential to fighting these threats. 

However, before getting cyber insurance, you may need to conduct a cyber insurance risk assessment to determine your systems’ weak points. Here’s a look at cyber insurance risk assessments, how to conduct one and more.

What is a cyber insurance risk assessment?

Before you get cyber insurance, your insurance carrier will likely conduct a cyber insurance risk assessment on your company. This assessment aims to identify the risk areas and security gaps your company faces. A cyber insurance risk assessment considers your technology, company protocols and daily employee procedures that may create security risks.

Why do you need a cyber insurance risk assessment?

The risk assessment benefits both the insurance carrier and the company it’s assessing. Insurance carriers gain the knowledge needed to underwrite the risk appropriately. A business with many areas that are vulnerable to security breaches will be at higher risk — and incur a higher premium — than a company with fewer issues.

The assessment also benefits the company because the insurer provides a checklist to help label vulnerable areas. With this information, the company can take measures to reduce or eliminate risks. Shoring up exposed systems and processes may prevent hacks and breaches while reducing the premiums the business must pay the insurer.

How do you conduct a cyber insurance risk assessment?

While an insurance carrier performs the cybersecurity risk assessment, businesses can help the process go smoothly by understanding what the carrier must examine and what systems it must access.

While the sequence of events may vary by insurer, the cyber insurance risk assessment will generally follow these five steps.

  1. Initial preparation: Your insurer will start identifying your crucial IT and data assets, including servers, cloud-based operations, customer information and intellectual property. This preparation helps the carrier understand the scope of what you’re protecting. [Related article: All About Intellectual Property Insurance]
  2. Asset valuation: Your insurance carrier will assign a monetary value to each tangible and intangible asset to quantify the financial impact of a breach or loss on your business. The carrier will consider data recovery fees, intellectual property infringement fees and possible loss of revenue.
  3. Risk analysis: Your insurer will conduct a risk analysis to determine the likelihood of events like data breaches. At this stage, it will consider your current security measures and assess their effectiveness.
  4. Assessment report: When the risk analysis is complete, the insurer will send a risk assessment report detailing each physical and nonphysical asset and highlighting the areas of greatest concern.
  5. Business review: The business will study the assessment report and the insurer’s proposed strategies to protect your company against identified risks. The company may develop or update its cybersecurity plan and inform the insurer of planned actions. During this step, the business and the insurer can discuss potential amendments to their proposed cybersecurity insurance coverage.
TipBottom line

To protect your business from a data breach, consider physical security measures, like key cards, and improve password security with password-management solutions that help create and store complex passwords.

What is cyber insurance?

A cyber policy is a business insurance policy that includes first-party and third-party claims. You’d file a first-party claim if your business had hard costs associated with a breach. Other people could file a third-party claim against you, alleging that your company didn’t adequately safeguard personal and private data. 

First-party cyber insurance covers the destruction of your property, including the following:

  • Investigation costs
  • Repairs to damaged equipment
  • Lost revenue
  • Consumer notification costs
  • Consumer credit monitoring costs
  • Ransom paid to a hacker to restore files

Third-party cyber insurance covers consumer data liability, including the following:

  • Legal fees
  • Settlements and court judgments
  • Regulatory fines

What is cyber liability insurance?

Cyber liability insurance is part of a cyber insurance policy. It protects against third-party claims that the business didn’t adequately or effectively secure personal and private data. Employee error and failure to implement safeguards could be listed as the cause of the data breach.

FYIDid you know

Cyber insurance provides first-party and third-party claims coverage. In contrast, data breach insurance covers costs such as lost revenue and credit monitoring but not attorney’s fees and regulatory fines.

How does cyber insurance help companies mitigate risk?

Cyber insurance won’t remove the risk you face from bad actors or employee errors; systems can still be vulnerable, and you could experience a loss. However, starting with the cyber insurance risk assessment, you can get a better handle on your most significant risk areas to avoid common business scams or mitigate an incident’s damage.

In addition to providing insight, cyber insurance helps pay for the damages resulting from a data breach. Many businesses wouldn’t be able to handle a security incident’s out-of-pocket costs — such as reporting, credit monitoring and regulatory penalties — or pay a hefty ransom to get their business back up and running. Without cyber insurance, a company would have a challenging time surviving a cyberattack

TipBottom line

Cyber insurance doesn’t replace general liability insurance, which you’ll need if your company faces claims of bodily injury or property damage.

Cyber insurance risk assessment FAQs

You have many options when shopping for a cyber insurance policy. Consider the insurance company as a partner in protecting your business from cybercrime. It’s wise to work with a company that will provide a cyber insurance risk assessment to help you understand your risk factors. The best liability insurance providers will help you identify your biggest problems and offer solutions to help shore up vulnerabilities.

Your carrier is also your partner if and when you must file an insurance claim. Good insurance carriers have expert teams to mitigate losses during a crisis. For example, in a ransomware attack, your carrier may provide a negotiator or offer technology experts to help shut down your systems or restore them when possible.

As you would when choosing any business insurance policy, inquire about exclusions and understand how policy limits work. You may be able to set a retroactive date on a cyber insurance policy. Some policies allow this because insurance carriers understand that you may not be aware of a breach for some time. You’ll pay an additional premium for a retroactive date, but this could be well worth it if you haven’t previously protected your company from cyber risks.

Tip: When you buy a policy, ask what constitutes a “trigger” for coverage. Some policies trigger coverage on the loss date, while others trigger it when a claim is made against the policyholder.

Your cyber insurance risk assessment should help determine how much cyber insurance you’ll need to insure your business adequately. Most small companies start with a baseline policy with $1 million in coverage for each occurrence and in the aggregate. The baseline policy usually has a $1,000 deductible.

Increase the coverage if you have an extensive database. The more data you keep, the more you become a target and the more exposure you have to higher fines, fees and costs. Businesses with multiple servers or employees who work remotely may also want to consider higher limits.

Consider your reliance on technology to store data, process orders and conduct business. If you’d be unable to operate if your computer systems were hacked or can’t afford the costs associated with a data breach, you need cyber insurance.

Ransomware attacks are rampant, and hackers target companies of all sizes. It’s often easier for hackers to breach smaller companies and hold their operations hostage. Don’t wait for a problem before you consider getting a policy and shoring up your defenses with a cyber insurance risk assessment.

  • Risks: In cybersecurity, a risk refers to the likelihood and impact of a successful breach of your IT systems that could result in damage or loss of business data or assets. For example, how likely is it that someone could gain unauthorized access to your network?
  • Threats: A threat is an action that can lead to a breach, like a phishing attempt from an external attacker.
  • Vulnerabilities: A vulnerability refers to a weakness in your cyber defenses that a cybercriminal could exploit. For example, a team member may not be well trained enough to spot a phishing email. If they received an email purporting to be from a member of the IT team asking for their security credentials to log in to your network, they may not realize they should investigate the request further before complying. Vulnerabilities can also be technical, like poor network configuration or unpatched software.
  • Liabilities: In cybersecurity insurance, a liability describes the costs you might be responsible for meeting to cover expenses that third parties, like customers, have incurred due to a data breach. Liabilities can include regulatory fines, legal fees and other related expenses.

Mark Fairlie contributed to this article.

Kimberlee Leonard
Contributing Writer
Kimberlee has spent the past 20 years either directly involved in insurance and financial services or writing about it. She’s a former Series 7 and 65 license holder and former State Farm agency owner. As a small business insurance expert, her work can be found on Fit Small Business and Thimble.
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