Effective vendor risk management is crucial as insurance companies increasingly turn towards outsourcing for technology and services. While outsourcing helps access advanced technology it also introduces challenges, such as increased regulatory scrutiny. With an increasingly interconnected digital landscape, malicious actors frequently exploit vulnerabilities in an organization’s network and this could include its vendors and third parties.
Technology partner vendor agreements often last five to seven years. Over such long periods, the risk landscape can change significantly. Having a third-party risk management framework spelled out will ensure ongoing oversight and safeguard against evolving threats, regulatory changes, and potential lapses in vendor performance.
A Vendor Risk Management (VRM) framework is the foundational structure supporting and sustaining the entire VRM program. It provides the essential guidelines, procedures, and best practices necessary to effectively manage risks associated with third-party vendors. Without a solid framework in place, any VRM program will struggle with inefficiencies, inconsistencies, and missed opportunities to mitigate risks.
A Vendor Risk Management (VRM) framework for insurance companies is a structured approach to identify, assess, manage, and mitigate risks associated with third-party vendors and service providers.
Imagine the VRM framework as the skeleton of a building. It defines the architecture and ensures that every component — from risk assessments to vendor monitoring and incident response — is structured and interconnected. This organization is crucial because it enables companies to systematically identify potential risks, assess their impact, and implement appropriate controls. Without such a framework, there's a risk of ad-hoc approaches and reactive measures, which can lead to vulnerabilities and missed regulatory compliance.
Here is why an effective third-party risk management framework is critical:
Also Read: Data Security and Privacy Risks Associated With AI and How to Overcome Them
The insurance industry in America, along with its third-party vendors, operates under stringent regulations set by both federal and state agencies. These regulations establish standards and best practices that companies must follow to ensure security, compliance, and operational integrity. Specifically:
The Insurance Data Security Model Law: Developed by the National Association of Insurance Commissioners (NAIC) and adopted by many U.S. states, requires insurance organizations to implement comprehensive information security measures. These include stringent protocols for managing and mitigating risks posed by third-party vendors
OCC (Office of the Comptroller of the Currency): Although the OCC primarily regulates national banks, its guidelines on risk management practices are often adopted by insurance companies to manage third-party risks effectively.
FFIEC (Federal Financial Institutions Examination Council): The FFIEC provides uniform standards and reports for financial institutions, including insurers, focusing on IT security, risk management, and third-party oversight. Insurance companies adhere to these guidelines to ensure robust cybersecurity measures (particularly if insurance platforms are on the cloud) and risk management practices.
CFPB (Consumer Financial Protection Bureau): The CFPB regulates financial products and services, including those offered by insurance companies. Compliance with CFPB standards ensures that companies treat customers fairly and transparently, particularly regarding third-party vendor interactions.
Additionally, insurance companies must meet reporting and auditing requirements set by state regulators. Each state's insurance department may have specific regulations that require regular reporting on compliance, financial health, and risk management practices. This includes annual risk assessments of third-party services.
Also Read: The Crucial Role of Business Culture in Software Vendor Partnerships
American insurance companies operate under stringent regulations and handle highly sensitive data, making a robust third-party risk management framework essential.
Given that most insurance platforms utilize external cloud services, much of the security responsibility lies with these cloud providers. The responsibility of your insurance technology vendor is to provide a system that is regulatory compliant. They must additionally manage the responsibility of ensuring that the cloud service providers adhere to their security obligations.
Here’s a comprehensive insurance vendor risk management framework that covers the full cycle of vendor interactions.
Efficient and secure vendor onboarding is crucial. This process includes:
Due Diligence:
Risk Assessments: Use a blend of automated tools and manual evaluations to perform in-depth assessments of prospective vendors. Automated tools use a security rating scale that measures an organization’s cybersecurity risk posture by providing a quantifiable metric that reflects its vulnerability to cyber threats and the effectiveness of its security controls.
These security ratings can be numerical 350 to 900 (with 750 and above a good score), or alphabetic grades, with A or B grades indicating better cybersecurity practices and lower risk.
Calculated through both passive and active assessments of an organization’s external security posture, these scales offer a clear, objective, and consistent way to ensure vendors meet or exceed this threshold.
Compliance Checks: Ensure vendors comply with relevant regulatory standards such as HIPAA for health insurers, PCI DSS for payment processing, and NAIC Model Laws for data security.
Onboarding:
Risk Management Strategies: Develop detailed risk management plans, assigning roles and responsibilities for continuous vendor oversight. Regular monitoring and assessments should be part of this strategy.
Baseline Security Postures: Establish comprehensive initial assessments covering all aspects of the vendor’s security framework, including compliance with standards like ISO 27001, SOC 2, or NIST CSF. Evaluate incident response plans and historical security incidents.
Service Level Agreements (SLAs): Define SLAs with specific metrics such as incident response times and data protection measures. For instance, an SLA might specify that a vendor must respond to data breaches within 2 hours and provide a resolution within 24 hours.
Criticality Levels: Classify vendors based on the criticality of the services they provide. For instance, a vendor providing a core insurance platform or cloud storage for customer data would be classified as high-risk and subject to more frequent reviews and stringent controls.
Regular Reviews: Conduct annual or bi-annual reviews for high-risk vendors, focusing on emerging threats. Real-time monitoring tools like Rapid7 or Qualys can provide continuous oversight.
Automated Tools: Utilize automated tools such as SecurityScorecard for ongoing monitoring and immediate alerts on security issues, such as unauthorized data access or breaches.
Efficient collaboration with vendors is vital for a successful VRM program. This process includes:
Centralized Communication Platform:
Automated Processes: Implement platforms that automate the completion and tracking of security questionnaires, reducing delays and improving visibility.
Vendor Security Pages: Require vendors to maintain up-to-date security pages detailing compliance status, recent security audits, and certifications. This transparency aids in the regular assessment and reassessment of vendor risks.
A secure and structured offboarding process is essential to mitigate risks. This process includes:
Access Revocation:
Automated Deactivation: Implement automated processes to revoke all access immediately upon contract termination. For example, use identity and access management (IAM) tools like Okta or SailPoint to ensure no residual access remains.
Audit Trails: Maintain detailed logs of access revocations to ensure compliance and facilitate audits.
SimpleSolve Inc. is an insurance technology innovator, we thrive on embracing and driving change to stay ahead of risks. With over 30+ business lines successfully implemented and 20+ ecosystem integrations, we bridge the gap between traditional insurance approaches and a digital mindset. Our SOC2 Type II Compliance and regular Web Application Security Audits, such as VAPT, ensure robust protection against vulnerabilities and penetration risks. Additionally, we enforce comprehensive backup and disaster recovery functions as a fallback to security breaches, underscoring our commitment to maintaining a secure and resilient environment.