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Cyber Insurance: Reputational Damage, Loss of Customers Fall-Out from Data Breaches


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 New Study Shows Reputation, Loss of Customer Loyalty Cause Most Damage to Bottom Line

We’ve all been watching closely the fall-out from Target’s data breach during the holidays late last year when the retailer disclosed that 40 million credit card and debit cardholders were compromised. A month later in January, Target raised its number of customers affected by the breach to 70 million and lowered its fourth-quarter profit forecast (in fact, sales for the fourth quarter declined by 5.3% compared to the same quarter a year earlier — largely due to the security breach). That same month, the retailer began a major public relations effort to woo back customers, including placing full-page newspaper ads apologizing for the attack.

A month later, in February, Target publicly apologized in front of a Senate Committee saying it was deeply sorry for the massive data breach it suffered and that it was determined to win back customers’ trust. It also sped up a $100 million program to implement the use of chip-enabled smart cards to protect against cyber theft. In March, Target also announced an overhaul of its information security practices and the resignation of its chief information officer, and it disclosed that security software detected potentially malicious activity during the breach, but its staff decided not to take immediate action.

On May 5th, the CEO of Target, Gregg Steinhafel, stepped down, a move attributed to the massive data breach. He was criticized on how he handled the breach, waiting almost a month before notifying its customers after the issue became public.

This chain of events illustrates the gravity of and significant costs a data breach can have on a company. And while Target is a huge corporation that suffered massive breach, all companies of all sizes are vulnerable not only to the direct costs related to a cyber attack but also to reputational and brand damage, loss of customer confidence, and loss of profits.

In fact, a recently released study by the Ponemon Institute shows that companies have had to spend more on their investigations, notification, and response when their sensitive and confidential information was lost or stolen. As revealed in the “2014 Cost of Data Breach Study: Global Analysis,” the average cost to a company was $3.5 million, which is 15% more than what it cost last year. Furthermore, the study cites that “critical to controlling costs is keeping customers from leaving”. The research reveals that reputation and the loss of customer loyalty does the most damage to the bottom line. Following a data breach, organizations spend heavily to regain their brand image and acquire new customers.

To help prevent such potentially significantly losses, companies should implement an incident response and crisis management plan. “Efficient response to the breach and containment of the damage has been shown to reduce the cost of breach significantly,” cites the Ponemon study.

Equally important is having Cyber Liability insurance in place. The Ponemon research underscores this, citing the important role of cyber insurance “in not only managing the risk of a data breach but in improving the security posture of the company.” What’s more, securing the right Cyber or Privacy & Network Security insurance is critical to respond to the various costs that come with a data breach, including coverage for crisis management.

At Axis Insurance Services, we can design Cyber Liability insurance policy that’s right for your organization, taking a look at your exposures and potential risks. Our policies can be designed to cover damage awards or settlements, legal defense bills, forensic investigation costs, notification, and remediation expenses. We can also provide coverage for the costs generated by an accidental transmission of computer viruses or other malicious code that harms another party. And, we can provide coverage for public relations and reputational management services. Please give us a call at 877.226.1027 to discuss your specific needs.

Sources: Mashable, Reuters, Ponemon Institute

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Blogged on: May 7, 2014 by Mike Smith
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