The Staggering Cost of Identity Theft

By, Michael Oliva
Senior Associate
The ALS Group

The Federal Bureau of Investigation (FBI) reports that identity theft is the fastest growing crime in the United States. It is also the number one consumer complaint received by the Federal Trade Commission, accounting for approximately 255,565 complaints in 2008. In addition, more than 30 states have enacted legislation requiring companies to notify consumers if their personal information may have been compromised. Even in states where notification is not required by law, failure to notify an individual of a potential identity breach may result in severe civil, regulatory and legal liability costs, as well as potential damage to a company's reputation and loss of consumer confidence. Nearly 10 million Americans are victims of identity theft annually according to the Federal Trade Commission with an estimated cost in 2008 of $48 billion.

The cost of a data breach is now $204 per comprised customer record according to the Ponemon Institute’s 2009 study. In the five years that the Ponemon Institute has conducted its study, costs have increased 48%.

Increasing incidences of corporate privacy breaches have resulted in a greater number of lawsuits, consumer backlash and regulatory actions, including fines. More than ever, customers today expect their personal data to be protected.

What is Identity Theft?

The unauthorized use of a victim’s information for financial gain is popularly referred to as identity theft. The victim is an unsuspecting individual, Business Corporation or other entity. The information used to perpetrate this activity is an instrument that can positively identify the victim and that is usually required by an institution. The institution is an authority that may offer various services, ranging from social benefits to financial credit. Identity theft is not new; the main factor that has contributed to this crime becoming widespread is the flow of sensitive information being easier to access by criminals. It is believed by experts that the current state of the economy has also led to the increase in criminal activity. These days, it is virtually impossible to conduct any type of transaction without collecting and storing personal information. Companies have set up large repositories for this data. Among the information collected in the U.S. is the Social Security number, which is one of the key pieces of data for establishing an individual’s identity. If this and other personal information falls into the hands of criminals, it gives them the ability to impersonate and represent themselves as the victim to the financial institution in the hope of establishing an account. The ability to open a financial account and make use of its offered services without liabilities to the perpetrator makes this a very attractive crime.

Business Implications

The alarming rate at which identity theft occurs and the devastating impact of the financial ruin it causes cannot be underestimated. Most important to the business is the implication that it has not done its due diligence to protect its customer’s information and therefore is liable.

Corporations need to consider customer and investor concern, the outcome of negative and embarrassing information, and the legal and regulatory pressures. Customers and investors alike lose confidence related to any negative news of a corporation, especially when it is perceived that the due diligence required to safeguard customer information was absent. An unforgiving and major event can cause a corporation to lose credibility and business to a competitor. Such an occurrence can be devastating to a company, possibly to an extent where it may not entirely recover.

Steps to Prevent

If people are aware of how identity theft occurs and succeeds, they can take steps to prevent that eventuality. The first step is to shred, shred, and shred. This basic preventative control limits access by external, unauthorized individuals. Internally, the combination of preventative and detective controls deters an authorized employee from taking advantage of privileged access. Access to information should be limited to job-related functions. Classifying data may help reduce the risk of excessive privilege and prevent a high cost of overprotecting information.

A privacy impact analysis is an integral part of an organization’s security management program. This assessment ensures that the risk of exposing personal identifiable information is contained at every level. By identifying vulnerabilities (e.g. personal data stored at processing vendors) throughout the business process, an organization can help reduce the possibility of identity theft occurring at different stages and safeguard (e.g. encrypting laptops) the information that has been entrusted in its care. The assessment creates a structured process for analyzing nontechnical and technical requirements, and compliance with relevant regulations.

Insurance

While the opportunity to contractually transfer the financial risk of identity theft is minimal to non-existent, there are insurance products on the market that can help transfer some of the financial risk that companies face in this area. Insurance products are available that offer coverage to the insured company for the following: legal liability damages; defense costs; regulatory action expenses; notification costs; crisis expenses; as well as post event services including identity theft recovery services such as education, assistance, and credit monitoring for victims. Limits of liability generally are available from $500,000 to $5,000,000 though first party (notifications) coverage is typically sub-limited to $1,000,000 or lower. The best way to get the right coverage that suits your business’ specific needs is to consult with an Independent Risk & Insurance Advisor.

In summary, when properly implemented, due care by organizations helps prevent a loss of credibility and money associated with embarrassing negative publicity, as well as legal repercussions. Organizations with these processes in place position themselves to not only save their reputation, but bottom line dollars spent on their Total Cost of Risk (TCOR) as well. It is imperative for organizations to take appropriate and reasonable measures to help reduce the risk of fraud through identity theft.



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Broker Fee Agreements and Full Disclosure

By, Edward A. Przebieglec
Technical Analyst
The ALS Group

We recently highlighted the importance of the full disclosure of broker compensation and the New York State Department of Insurance's effort to expand mandatory disclosure rules. A recent case out of Massachussetts only serves to reiterate the
danger to customers of undisclosed fees:

(Massachusetts AG Sues Agency Accused of Collecting Bogus Fees)

While the brokers referred to in the above article were particularly unscrupulous, appropriate disclosure regulation serves to discourage any such behavior. We continue to support the intent of full disclosure of broker compensation.
Many states already require fee agreements if brokers are collecting fees and commisions. The proposed regulation will improve the environment for insureds seeking to mitigate the cost of insurable risk in New York state.

A Stand Alone Insurance Policy is Best for Toys

By, Maggie Reilly
Technical Analyst
The ALS Group

Are you an owner of an ATV, snowmobile, jet ski or RV? Then you know the value of a good time. What is not so easily known is where to find the best insurance protection for your toys. Homeowners and Auto policies rarely cover both property and liability adequately for these types of vehicles. Therefore, in most cases, it is a best practice to procure a stand alone policy. A stand alone policy has the best safeguards in place to ensure proper coverage is in full effect. At a minimum, liability insurance is required in most states and relying on a Homeowners or Auto policy to provide the necessary coverage is a risky assumption that can lead to gaps in coverage (1). ATVs, RVs, jet skis and others are generally seen as a carveback on most policies. However, when specifically scheduled on an auto policy, ATVs are only covered for liability, not medical payments or physical damage and restrictions exist on who and what is covered. Another downfall is the increase in overall deductibles and elimination of liability coverage for other people (2).

Things to look out for on Homeowners and Auto policies are exclusions on motorized land vehicles and recreational vehicles. For example, some insurers have a very specific, all-encompassing definition for Recreational Motor Vehicles and corresponding exclusions which broadly exclude any loss including equipment, accessories or any electronic devices in or on the vehicle nor will it cover any defense costs. The only vehicles explicitly covered are those not subject to motor vehicle registration, vehicles used to service a residence or those designed to assist the handicapped (3).

The perks of obtaining a personalized policy include roadside assistance, towing and custom parts and equipment among a variety of other things (4). A tailored policy ensures that you will not pay premium on snowmobiles in the summer or jet skis in the winter. Having a policy dedicated to a particular risk is useful when an unforeseen claim arises. Having the proper insurance coverage in place will ensure that you will continue to have piece of mind while out having fun with your toys.



1 “ATV Insurance Requirements.” New York State Department of Motor Vehicles
2 “Think Toys to Enhance Retentions.” American Agent & Broker – Dec. 09
3 “Bodily Injury Arising Out of Professional Negligence” ChartisInsurance.com
4 “ATV Insurance Coverage.” Progressive.com

NY Broker Pay Rules

The NYS Department of Insurance took the final step toward promulgating new regulations that would require agents and brokers in the state to disclose all forms of compensation they receive from insurers upon request. The regulation is open for public comment until January 16th at which point the NYSID will have the authority to adopt it. As expected there is widespread opposition from the Independent Agents & Brokers Association calling the measure "unwarranted". Frankly we applaud the NYSID for their leadership and vision to compel transparency in this important area. The issue of compensation was surfaced in 2005 through a NYAG scandalous investigation into broker placement and compensation practices. This regulation will support the intent of full disclosure that was championed earlier but not called into law. The regulation would compel agents and brokers to disclose several key areas surrounding placements including:

* A description of the nature, amount and source of any compensation to be received by the producer or any parent, subsidiary or affiliate based in whole or in part on the sale.

* A description of alternative quotes presented by the producer including the coverage, premium and compensation that the producer, parent, subsidiary or affiliate would have received based in whole or in part on any alternate quotes.

We wholeheartedly support the regulation as we feel it will only enhance the insurance placement process and allow insureds and their advisors to calibrate value for money. A key goal in any insurance placement is to allow the Insured to mitigate insurable risk and use insurance and brokerage resources to help lower their Total Cost of Risk (TCoR).

The regulation can be found on the NYSID web site:
http://www.ins.state.ny.us/r_prop/pdf/rp194txt.pdf

Does an Economic Recession equal Compromised Safety?

By, Richard W. Sarnie, CSP, P.E.
SVP & Chief Operating Officer
The ALS Group
December 11, 2009

Background

The current economy and the most recent recession have been the worst economic times since the great depression. With companies trying to find ways to survive, there are no sacred cows when it comes to cutting costs. Layoffs, outsourcing, and doing more with less are all strategies that businesses are employing to survive. While the need to cut costs is understandable it is, unfortunate, one of the strategies many companies are using is cutting back on their safety program.
No matter the business, I am seeing resources devoted to employee and customer safety programs suffer. Whether it is deferring/eliminating training, replacing worn personal protective equipment or getting by with defective machinery, safety seems to be another casualty of this economy. While this may sound like an effective measure, cutting safety will lead to increased costs and exposure to fines and penalties in the long run.
It may be easy for business owners to justify the cuts. Comments I constantly hear are “we can’t afford to do safety training, I am trying to keep the doors open” or “I can’t afford to provide new gloves to my employees, they will just have to make due with the old ones”. These strategies are not only short sighted; they will cost the company, on average, 4 to 10 times more in the longer term. In the end, companies must be focused on reducing their Total Cost of Risk (TCoR). The strategy of cutting safety will ultimately increase their TCoR dramatically and thus reduce their profits even further.

Accidents Don’t just Happen

One of the biggest misunderstandings is that accidents just happen. This is furthest from the truth. Accidents are caused by events that are not only preventable, they are predictable.
Businesses are not having new and improved injuries (or accidents); they are the same ones over and over again. In fact, near miss accidents or unsafe actions occur on average 400 times before someone is injured!
So if accidents are predictable, they are preventable. The old adage is that safety is written in peoples’ blood. I would prefer to say that safety is written in lost profits. While it is true that having a safety program is a cost to the business, not having one will cost the firm a great deal more.
Increased insurance costs, law suits, legal fees, lost productivity, etc are all costs that exist following an accident. Don’t forget employee morale and company reputation all suffer with a poor safety program. These are avoidable costs and will ultimately preserve capital for a company. Injuries/accidents are a waste of money! So if companies have a road map to save these costs (injuries/accidents), then why do they cut the road map to expose themselves to potentially additional costs? The answer is that they believe that accidents just happen and that their safety program is a cost that the firm can cut or reduce without much risk.
The informed business owners are going against this trend and realize now is the time to invest in their business. A strong safety program protects your most valuable assets; your customers and employees. When the economy begins to turn around, you will need a well trained employee and a loyal customer base. A strong safety program ensures that will happen.
So while it may make sense to cut back on safety during these tough times, safety needs to be one of the items that businesses keep in place as one of the staples that keeps your business profitable. Don’t let poor economic times put a wrench in your safety program and cost your business more in the long run.