Traditionally, risk management has been applied to business environments where tangible assets are exposed to physical perils. This model changes with increased reliance on Internet technology and areas where this change is most evident are discussed below.
First party risks
As well as risks to tangible assets and physical perils, companies are now exposed to loss of or damage to their intangible assets from a range of cyber perils. Intangible assets largely comprise vital information assets, whilst cyber perils include hacking attacks and computer viruses. What would be the cost to your company if vital information assets were lost, corrupted, or destroyed? Given the cyber perils noted above, and given the reliance on Internet technology as a business tool, companies also need to consider the costs of disruption to network applications or e-commerce activities. The impact on earnings can occur within hours rather than in days or weeks. The implications of business interruption from an e-commerce perspective can be significant and hence the development of adequate contingency plans is critical.
Third party risks
e-commerce models and activities have created new areas of exposure, as well as changing the magnitude of existing exposures.
By focusing upon three critical concerns of risk management - the frequency of loss, severity of loss, and cost of resolution - we can identify at least five ways in which Internet technologies are affecting the management of liability risks and exposures:
- Increases in the number of claims. New portals and the falling cost of PCs have increased access to the Internet on a global basis.
- Increases in the severity of claims. The increasing dependency of global business on Internet applications increases the risk of severe claims in relation to the potential revenue stream of critical business systems.
- Increases in the number of defendants. Internet technologies support the economics of outsourcing critical business functions and products components. Plaintiffs can pursue many more defendants who had significant or peripheral involvement in the alleged torts.
- Increases in the complexity of "traditional claims" and procedural issues. Claims are becoming more complex because parties are asserting aspects of Internet technology that make cases more factually or legally difficult to resolve. Venue in Internet cases is also difficult to resolve - is the case to be tried where the server is located, or where the customer is located?
- New types of claims and remedies. Internet technologies create new categories of potential defendants and entirely new categories of potential claims. Expensive litigation can result, for example, from the spread of a computer virus from a company's system to another system, or disclosure of customers' personal or financial data.
Risk management and insurance
Technology related risks have become a vital aspect of companies' overall risk profiles. Often the management of technology risks rests upon information technology departments. However, it is no longer prudent to consider such business risks as a technology problem to be handled by IT management. Risk management must be redefined to address the effects of e-commerce models and strategies.
Traditional insurance policies were not designed with e-commerce risks in mind, and while some aspects of cover may be provided under existing insurance policies, companies need to consider transferring identified e-commerce risks. This may be achieved in certain circumstances by endorsing existing policies but will more likely involve consideration of the specific Internet and Network Insurance policy forms now available in the insurance market.
Given the ever-increasing reliance of businesses worldwide on the Internet and related technology, companies need to pro-actively manage risks and insurance related issues, rather than waiting until they are confronted with a serious loss scenario.
Risk management strategies must incorporate the assessment of e-commerce exposures and consider whether specific Internet and Network insurance policy forms are necessary.
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