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City of Atlanta Cyber Nightmare Demonstrates Why Businesses Need Captive Insurance
April 3 2018

City of Atlanta Cyber Nightmare Demonstrates Why Businesses Need Captive Insurance

Randy Sadler Captivating Thinking

It’s not surprising that many businesses are not fully prepared to for cyber risks.  The nature of this threat continues to evolve as technology advances, cloud computing grows, social media continues its advance and cyber criminals become more sophisticated.

And, last week it became clear that the City of Atlanta wasn’t ready for a cyber-attack either.  According to an MSN.com article titled “A Cyberattack Hobbles Atlanta, and Security Experts Shudder”…

Atlanta’s municipal government has been brought to its knees since Thursday morning by a ransomware attack — one of the most sustained and consequential cyberattacks ever mounted against a major American city.

Also, as cyber-attacks are prone to do, this one caused massive business interruption.  According to the article,

But as the city government’s desktops, hard drives and printers flickered back to life for the first time in five days, residents still could not pay their traffic tickets or water bills online, or report potholes or graffiti on a city website.

Captive insurance companies are ideal vehicles for addressing cyber risk.  Because cyber threats are relatively new and ever-changing, it can be difficult for third party insurance coverage to keep up.  Also, cyber threats can have a tremendous spill-over effect, touching off a chain of secondary losses.  For example, businesses impacted by a cyber breach often suffer well into the future as they not only incur liability costs, but also suffer lost sales as they endeavor to regain the trust of customers.

Because captive insurance companies can issue customized, more flexible coverage to their parent companies, they can serve as an ideal insurance solution for cyber risk.  Furthermore, a captive’s flexibility also enables the parent company to maintain third party commercial cyber insurance and supplement third party coverage with a broad insurance policy from the captive to address gaps and secondary losses caused by a cyber incident.

Businesses that have third party cyber insurance in place, should consider supplementing their cyber insurance with a blanket cyber policy in a captive insurance company.  Many businesses do not have cyber insurance policies in place.  And, it is difficult to get excited about purchasing additional insurance.  For many businesses, insurance is a necessary evil…it is definitely a necessity but can also be viewed as a sunk cost.  Owning a captive insurance company gives a business an additional tool to address “non-traditional” but very real risks like cyber-attack.  A business can purchase cyber insurance from its captive insurance company and simultaneously grow profit in its captive insurance company when claims are low.

Also, because captive profits are at stake, the business has an even greater incentive to take active security measures to reduce the likelihood of cyber-attack and other digital threats to business data.

The Best Self-Insurance Money Can Buy – ERM With A CIC The Best Self-Insurance Money Can Buy – ERM With a CIC Part 2

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Stronger Business Model

Businesses who implement ERM programs combined with a captive to plan for unforseen risks stand a better chance of surviving, and passing to the next generation.

Improved Cost Controls

Captive owners can leverage their ERM and captive programs to improve their negotiating ability when renewing their commercial insurance coverages.

Wealth Accumulation

Profitable captives will see their reserves grow over time to significant sums which can be utilized by their owners for retirement or other life cycle needs.

Advantageous Tax Treatment

Insurance companies are the only entities allowed to expense projected future expense against current-year revenues (claim reserves). Small captives (premiums of $2.2M or less per year) may also elect to only be taxed on their investment income, potentially resulting in substantial tax savings for their owners.

Insurance Profits

Utilizing your captive to reduce or replace your commercial insurance coverage with policies issued by your captive allows you to capture insurance profits previously realized by the carriers.

Improved Risk Management

Adding a captive and ERM program will result in a higher awareness and enhanced strategies for how your organization thinks about and plans for all risks.

Asset Protection

The assets held by a properly organized and managed captive enjoy a very high degree of protection from both the business’ and business owner’s creditors.