Warren Buffett’s Take On Cyber Insurance

Warren Buffett recently made clear how risk-averse his business is when it comes to cyber insurance. Addressing his annual shareholder meeting, he summarized the state of play like this: “I think anybody that tells you now they think they know in some actuarial way either what [the] general experience is like in the future, or what the worst case can be, is kidding themselves”.

These are wise words, from a famously far-sighted individual. However, the question is: What are we going to do about this? Certainly, at RedSeal, we do not think this is acceptable. Businesses rely on insurance providers for several critical things. It starts with the basic concept of insurance: you hand your premiums over to an insurer so that you’ll get some protection against the financial downsides of hard-to-predict and catastrophic events. But the relationships between insurers and those who buy insurance has a symbiotic, mutually beneficial aspect to it as well (as Warren Buffett knows). The two groups aren’t adversaries (despite the frictions that result when it’s time to pay up); they have the same long-term interest in reducing the cost and number of catastrophic events. Think of the way our car safety has improved over the last few decades. Some of that improvement was driven by government regulation, but more of it is a result of insurers offering price breaks for things like raised, central brake lights, or ABS, or alarm systems. Insurers investigate accidents in detail, and have learned which car features cause or prevent accidents. When they price that knowledge into their products, they motivate car buyers, who in turn motivate car makers. You might think car makers should just know what makes cars safer, but they don’t really know how people will behave behind the wheel or how much safety people are willing to buy. The process works well over the long haul because of insurance companies’ critical role in gathering data, quantifying cost/benefit, and pricing that into policies that people can understand.

So how do we make this work for cyber insurance? Today, the market for cyber insurance is growing rapidly. Companies want the product, insurers are selling large numbers of policies, and there is still more demand than insurers can comfortably supply. The main thing holding insurers back is the ability to correlate good or bad security behavior against real incident rates. We’re close – the security industry knows a lot about good security, in much the same way that car makers know how to make a car safer, but they aren’t sure about the cost/benefit for any given action. This means we’re spring loaded – there’s market demand, there’s a lot of knowledge about security, but the last critical ingredient is the ability for actuaries at insurance companies to compute the hard-quantified payoffs (change in “Annualized Loss Expectancy” would be the technical term).

This is why RedSeal is working with XL Catlin on innovative ways to measure the cyber practices of companies buying insurance. It’s an exciting time – something we don’t get to say often about the insurance business!