CrowdStrike Losses and Warren Buffett's Cyber ​​Insurance Warning

Passengers wait at T3 IGI airport in New Delhi, India on July 19, 2024, after a major outage in Microsoft's cloud services caused widespread flight cancellations and delays.

Vipin Kumar | Hindustan Times | Getty Images

At Berkshire Hathaway's annual investor conference earlier this year, Warren Buffett and insurance executive Ajit Jain issued a headline-grabbing warning that Berkshire would be cautious when it came to cyber insurance, and in fact advised insurance agents to only sell cyber insurance if they absolutely had to do so and were prepared to take a loss in order to keep customers happy.

The main reason cited is the difficulty of assessing the scale of loss that could result from a single event that spreads across an entire technology system, with Jain giving a hypothetical example of a major cloud provider's platform being “outaged.”

“That aggregation potential could be very large, and what scares us is that we can't tolerate the worst-case gap,” he said.

Jain's hypothesis seemed prescient when a quality-control problem at cybersecurity company CrowdStrike caused a global IT outage, halting flights and cargo shipments, closing retail stores and forcing hospitals to rely on paper medical records.

“Insurers have been concerned about something like what happened with CrowdStrike ever since the cloud was introduced,” said Dale Gonzalez, chief innovation officer at cybersecurity risk analytics firm Axio.

But Gerald Grombiecki, senior director in Fitch Ratings' U.S. insurance group, said the cyber insurance industry largely predicted CrowdStrike's collapse accurately, and he expects it to be manageable rather than catastrophic for cybersecurity insurers.

“There will be an impact because there will be losses,” Grombicki said. “But the modelling is broadly correct and we think the industry will broadly cope well. There may be some insurers that misprice premiums.”

Fitch estimates that insured losses will not exceed $10 billion and will end in the mid- to high-billion dollar range, something the industry has largely priced in.

The CrowdStrike collapse was a blessing in disguise for the cybersecurity insurance market. For one thing, it didn't result in any significant physical damage, such as power plant explosions, dam collapses or fires caused by overheating equipment, which are increasingly becoming risks from cyberterrorism.

“A cyber event with more physical impact would be much greater in scale and scope of losses,” Grombicki said.

Moreover, while CrowdStrike is widely deployed, its market share is estimated by Fitch at 17%, limiting the overall impact.Among companies using CrowdStrike, the hardest hit appear to be businesses that require 24/7 availability, such as hospitals and airlines, Glombicki said.

Another factor that helped limit losses and spread them unevenly around the world is that CrowdStrike's outage affected regions such as Australia and Pacific Asia during business days, while other markets, including the US, were hit overnight or in the early hours, with many companies able to restore their systems within hours.

The “bad times” may continue for some insurers

Not all cyber experts are so confident at the moment. Josephine Wolff, an associate professor of cybersecurity policy at Tufts University's Fletcher School, who has studied the evolving market over the past few years, worries that CrowdStrike's collapse could send shock waves through the nascent cyber insurance market.

“It's still pretty early to assess the volume of claims that insurers will face as a result of CrowdStrike, but judging solely from the impacts we're seeing in the news, we feel there will be a massive amount of business interruption claims across all industry sectors and it will be a very bad situation for insurers,” Wolf said.

Wolf said the duration of the outages will affect compensation payments, with some businesses without power for hours and others still struggling days later.

She compared it to the “NotPetya” cyber attack launched by Russia in 2022 that halted much of the world's cargo shipping.

“Some of these outages were shorter than those seen after NotPetya, which could result in smaller damage claims, at least in some cases,” Wolff said. But she noted that CrowdStrike's outage had a significant impact on companies, whereas NotPetya's was not.

“The U.S. has by far the highest adoption rate of cyber insurance, so we suspect this will be a major event for the cyber insurance industry in terms of both claims volume and dollar value,” Wolf said.

In addition to the unequal impacts, cyber insurance policies themselves vary widely.

“Cyber ​​insurance policies can vary widely; they're not standardized and terms can vary even within a company depending on who writes the policy,” Grombicki said.

Anticipating business interruption claims and litigation

Insurers are already aware of the unique challenges that cybersecurity poses, Gonzalez said. As a result, they're trying to spread losses wisely by diversifying their coverage. But the problem with cyberspace and securing it is that not much is known about it yet. But he doesn't think that will hold back the insurance market overall.

“The losses won't be as bad as last year's hurricanes,” Gonzalez said, adding that the comparison isn't necessarily apples-to-apples because many more businesses in hurricane zones have insurance than have cyber insurance.

Gonzalez said the main claims will be for business interruption, which some policies specifically exclude, but he expects the CrowdStrike incident will spur litigation.

“CrowdStrike will be sued. There will be litigation,” he said.

“Everybody is very familiar with fire insurance because it's been litigated so many times,” Gonzalez said.

Cyber ​​insurance, on the other hand, has not yet been fully litigated and no protocols or precedents have been established.

“This case will help define business interruption and third-party liability. The industry needs definition and hopefully the litigation will address that,” Gonzalez said. “Cyber ​​events are evolving in ways that are somewhat unpredictable. It creates a very dynamic environment,” he said, but added, “I don't think the CrowdStrike incident is going to dramatically change how people think about insurance.”

Ironically, Grombiecki said, the CrowdStrike event could raise awareness of cybersecurity and draw even more customers into the market. “The board will be asking questions about that,” he said.

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