Network downtime insurance: A parametric solution

By 29 January 2024Blog

Network downtime insurance provides coverage for financial losses and other negative impacts following an unexpected interruption to a third-party supplier’s network services. Downtime may be caused by power outages, natural disasters, equipment failure, or any other event that prevents a service from running normally.

Digital transformation means there is now a high dependence on suppliers’ technology infrastructures such as the cloud services to support business activities. While technology is a boon for business efficiency, a network failure is a serious operational risk – especially for businesses that rely on continuous availability, such as retail, healthcare, and professional & financial services and manufacturing.

Even a single hour of downtime can have a huge financial impact. According to recent research from the Uptime Institute, the number of outages costing over US$100,000 has soared in recent years, and over 60% of failures result in at least US$100,000 in total losses. Moreover, a 2022 report from Information Technology Intelligence Consulting (ITIC) puts the hourly cost of downtime at more than US$300,000 for 91% of SMEs and large enterprises.

Network downtime insurance

The cloud is now the backbone of many businesses and is certain to become even more important with the relentless growth of digital services via the internet. Network downtime insurance is a parametric solution to protect businesses from losses arising from network service providers, such as Amazon, Google and Microsoft.

Large businesses usually depend on more than one cloud platform, which means they are less vulnerable than businesses that run on a single vendor’s platform and have highly competitive, time-sensitive models. For these businesses, network downtime insurance can be invaluable, particularly given the growing complexity of networks.

Service interruptions at cloud providers such as Amazon Web Services, Google Cloud, and Microsoft Azure, can be hugely damaging. For example, the major outage at AWS in 2021 affected millions of users and disrupted everything from Netflix to fast-food delivery. Given the potential financial impact of an outage, insurers are challenged to quantify the business risks. A client’s loss is an opportunity cost, so how do you calculate a precise figure? Because traditional measures don’t apply, normal loss-based indemnity won’t work, so for a policy to cover network downtime, insurers must use alternative risk parameters.

With parametric insurance, the cover is triggered when the insured’s cloud is down for a period specified in the policy, subject to a time-based deductible and possibly an indemnity per hour, which can simplify the claims process. This approach could be used to monitor cloud downtime, which can shut down e-commerce worldwide.

A network downtime monitoring agent – rather than the insured – would inform the insured and the relevant risk carriers when the policy was triggered, resulting in a swifter claims service. Policyholders would need only confirm that they have suffered a business loss.

Cybers insurance versus network downtime insurance

Although standard cyber insurance covers cloud downtime due to security failure, operational failure, or system failure of the insured’s own operations, it typically does not cover downtime due to non-malicious cyber events at a third-party network service provider.

Most of the carriers that Elmore works with offer business interruption payments actioned by a cyber security incident, however the business has to be affected for a period (depending on the policy) ​​ranging from 8-24 hours or more.

In contrast, parametric solutions are designed to pay after just one hour and so are a useful supplement to cyber insurance policies, where business disruption provisions are triggered only after a longer period.

Like other parametric insurance products, network downtime insurance is based on pre-defined parameters – hence the name ‘parametric’ – and there is no need to negotiate losses or file claims for damages.

Bridging the protection gap

Parametric downtime cover is a valuable way to bridge the protection gap, as cyber insurance is not a blanket solution and a business can be left exposed when normal operations are interrupted by third-party non-malicious cyber incidents. In addition, with the growing reliance on cloud technology, there is even more need to seek adequate cover, particularly for businesses that depend on continuous service.

To understand your downtime risks, speak to an Elmore Cyber Client Executive. We provide insurance reviews to assess your current coverage, whether for cyberattacks or downtime threats from non-malicious third-party events, and will advise on the best insurance for your needs. Contact us today.

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