Online shopping delivers greater retailer risk

Millions of us have been flocking to high streets and shopping centres over the last few weeks, but an increasing number are choosing to shop from the comfort of their homes – and offices – using the internet.

As household income is squeezed, more and more customers are looking to go online, says David Gray, UK Retail Analyst at Planet Retail.

“We anticipate the general trend towards online will continue as more and more consumers will turn to the internet to research products and make purchases,” Gray says. “In the current environment we have seen internet sales grow by double digits as consumers go in search of better promotions.”

Vulnerable period
According to the British Retail Consortium (BRC), 2011 has not been a good year for UK retailers. With austerity measures beginning to bite, consumers are making fewer purchases, a spokeswoman for BRC says.

“Christmas is the most critical spending period and retailers are hoping that a good December will help make up for the rest of the year,” she says.

A lot is riding on Christmas sales, so any problems with internet purchases can have even greater implications for retailers. “When sales volumes are up, the potential for problems increases,” said the spokesperson for the BRC.

“Last Christmas the delivery of internet orders was affected by the severe snow and freezing conditions. But retailers have learnt the lessons of last year’s bad weather and have developed ‘click and collect’ which allows customers to pick up their goods from a nearby store.”

Online opportunity and risk
The move online presents retails with a host of new risks, says Ben Beeson of Lockton. The most obvious risk is of network outage or downtime during a busy trading period, with potentially disastrous consequences for a company’s finances and reputation.

“Traditional property insurance will not cover internet downtime. However, specialist cyber insurance can protect against some non-physical damage losses triggered by a virus or a hacking,” says Beeson.

An emerging and increasingly important risk for retailers is protecting their customers’ data, he adds.

Recent years have seen a number of retailers suffer costly data breaches, often involving consumers’ sensitive credit card information. Earlier this year, electronics firm Sony suffered a major breach that is expected to cost the company $1bn.

Increasing awareness
“Cyber privacy and security is a big issue for retailers as they increasingly move online and as they hold more sensitive information on customers such as credit card details,” says Paul Bantick of Lloyd’s insurer Beazley.

Cyber insurance provides retailers and other companies that hold sensitive personal data with cover in three main areas, adds Beeson. Specialist insurance will pay for the cost of responding to a breach, as well as helping a company fund the expense of dealing with regulatory investigations and defending civil litigation, he says.

Insurers recently expanded cover to include the risk of falling foul of data security standards set by the big credit card transaction companies, Beeson continues.

Europe to follow US
Most retailers in the US now routinely purchase specialist cyber insurance, says Bantick. Tough data protection laws in the US make dealing with a data breach very costly. And evolving data protection laws and a growing awareness of the reputational damage of a major data breach are likely to lead to more retailers buying cyber cover in Europe, he adds.

“Regulation tends to drive the purchasing of data breach insurance, and as European rules get tougher we will see a flurry of interest in cyber insurance from retailers and other sectors that handle personal data,” Bantick said.

Beazley’s Breach Response enables companies to respond quickly to a data breach, providing access to services and covering the cost of notifying customers, legal, forensic and crisis management services. Beazley expects to release a UK version of its popular Response product next year.

Heightened risk
Hackers would find a high profile data breach appealing at this time of year, and a large data breach of customer credit card details could prove costly, both financially and for a retailer’s reputation, says Bantick.

As the average transaction value increases, it gives cyber criminals and fraudsters more opportunity and increases the potential severity of the consequences, he says.

Insurers are able to adapt cover to respond to busy periods like Christmas, says Beeson. For example, insurers can provide higher limits at peak times, he says.

Cyber attacks were ranked as the twelfth most concerning risk by 500 business leaders in Lloyd’s Risk Index 2011. The survey, carried out by the Economist Intelligence Unit, was described by Richard Ward, Lloyd’s Chief Executive, as a “snapshot of two years of economic and political turmoil”. Find out more about the findings in Lloyd’s Risk Index 2011