by Brad Gow

Information technology has wrought vast and rapid changes in the global economy. In virtually every industry, a revolution in computing and communications has radically altered the way business works. The ability to send massive amounts of data around the world in milliseconds has enabled businesses to communicate and collaborate worldwide, to set up back office and customer service operations an ocean away, and to efficiently build and market products globally. Whole new industries have arisen, from Internet portals to online retailers. This transformation has created a wide range of new opportunities for those businesses adept enough to take advantage of new technology.

New Opportunities, New Risks
The Information Age, however, has engendered not only new opportunities but also new risks and liabilities. As business becomes ever more information-based, the value of that information — and the ease with which it can be transmitted — creates opportunities for criminals who can quickly turn purloined data into profits. Companies that fail to adequately protect sensitive proprietary and client information risk not only the loss of sales and customers but also claims and lawsuits for loss sustained by customers and the public at large.

The risks have escalated sharply in recent years as computer-savvy criminal gangs have mounted increasingly sophisticated attacks to steal personal and proprietary data from corporate networks. The heightened threat level has made data security a critical concern for businesses as well as for their clients and customers.

Criminals are not the only entities creating new liabilities for business. Responding to consumer fears about privacy and identity theft, state and federal legislators are mandating increasingly strict standards for collecting, managing, and protecting sensitive data. The technology revolution has been followed by a regulatory revolution.

The new regulations have transformed the liability landscape for businesses, which now face the possibility of heavy fines and lawsuits should their data-protection efforts fail. Businesses also face severe damage to their reputations as state laws increasingly require them to publicize security breaches.

While businesses typically look to insurance to transfer risk, they cannot count on traditional insurance policies to protect against these new technology risks, because most insurers exclude “cyber” risks from their programs. To deal with the new risks, a rapidly growing specialty market has emerged that offers new coverages specifically targeting the exposures inherent in a digital economy.

This article discusses how technological changes have altered the global economy and the risk landscape for business, how cyber criminals are taking advantage of new vulnerabilities, how new regulations have changed the liability landscape, and how the insurance industry is dealing with emerging and evolving cyber risks.

The Technology Revolution
The ability to accurately calculate, manipulate, and publish huge amounts of data is taken for granted in today’s world of high-powered computers. But the quest to build a machine to accurately perform calculations and print out the results dates to the dawn of the Industrial Revolution. The first efforts to create a mechanical means to reckon repetitive sums, such as interest and astronomical tables, were made by leading 17th Century European intellectuals such as Blaise Pascal and Gottfried Leibniz.(1)

The need to produce accurate astronomical tables for navigation and seaborne trade — a crucial market for the nascent insurance industry at Lloyd’s — helped to spur the design in 1820s Britain of a machine to calculate and print mathematical progressions. English mathematician Charles Babbage endeavored at the time to build a mechanical computer called the “Difference Engine” — a machine that was finally built and proven to work in 1991.(2) The calculating portion of Babbage’s machine, built for the Museum of Science in London, has 4,000 moving parts, is 11 feet long, and weighs nearly three tons.(3)

More than a century after Babbage designed his mechanical computer, the first modern programmable electric computer was built on an even more massive scale. The Electronic Numerical Integrator and Computer, or ENIAC, developed to calculate artillery firing ranges for the U.S. Army and dedicated in 1946, weighed 30 tons, had 18,000 vacuum tubes, and filled a large room.(4)

The development of integrated circuits in 1959 sparked the trend of ever-increasing computing power, summed up by Intel Corp. founder Gordon Moore’s famed prediction, known as Moore’s law, that the number of transistors that could be placed on a computer chip would double every two years.(5) The rapid escalation in computing power is highlighted by the fact that a three-pound laptop today has a thousand times more computing power than ENIAC.

The Internet Revolution
The revolution in computing was accompanied by a revolution in communications. The Internet Age began in 1969, when researchers at University of California at Los Angeles connected a computer to a refrigerator-sized switch, the first step in getting two computers to talk to each other.(6) Twenty years later, the World Wide Web was created by Tim Berners-Lee, who also developed the first browser a year later, in 1990.(7)

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