Cloud computing: Business opportunity or data threat?

In today’s world, we are surrounded by and enjoying the benefits of advances in technology. As mechanical, electronic and information technologies evolve and intertwine, so do the risks of breakdown and security breaches. One of the most substantial trends impacting businesses today, is “cloud” computing.

What is the cloud?

Cloud computing can be loosely defined as:

Outsourcing what would traditionally be local IT assets (software and hardware) to a third party, and accessing them via the Internet.

Essentially, this means that cloud computing is a business model, not a technology, which allows businesses to “rent” access to IT assets rather than own them. Cloud computing comes in different service models:

  • Software as a Service (Saas),
  • Platform as a Service (PaaS),
  • Infrastructure as a Service (IaaS)

And it’s delivered in different deployment methods:

  • Public
  • Private
  • Hybrid
  • Community

All of these models rely on essentially the same technology improvements and all present new risks to businesses.

Where is the cloud?

The Cloud resides or operates within physical buildings and equipment. You can think of the cloud as data centers or warehouses where businesses store and can access their files and applications for their own operations.

These data centers number in the thousands and do not have to be anywhere near business operations. Some of the biggest are Amazon, Microsoft, IBM and Google. However, there are many other cloud providers.

To start a cloud service you just need a building, some servers and a little bit of determination and know-how. As a result, there are thousands of cloud data centers and hundreds of cloud providers in the US alone. Offshore providers account for many more.


Not all cloud providers have adequate protections in place for outages. Many lack sufficient standby power generators and have limited Uninterruptible Backup Power (UPS) capacity. 55% of cloud outages are due to inadequate UPS capacity and about a third are caused by water intrusion.

The combination of an aging electrical grid and increased severe weather incidents means power blackouts are on the rise.

Plus, cloud centers are prime targets for hackers. Cloud providers are hit with literally hundreds of attacks every day. They don’t advertise this for obvious reasons, but it’s a virtual arms race between hackers and cloud providers.

Small business cloud use

The percentage of US small businesses using cloud computing is expected to more than double in the next six years from 37% to nearly 80%. And cloud computing is the #1 IT priority for small and mid-sized businesses.

This means that more small businesses will have cloud dependencies and new risks that come along with the cloud. While 74% of organizations are confident in their cloud security, there are some serious concerns, including risk of unauthorized access, data integrity and data protection.

While use of the cloud today is generally associated with the ability to reduce costs and improve efficiency, widespread adoption is projected to have a transformative and disruptive effect on the US small business community.

The cloud is creating a new era of opportunity for small businesses, making it cheaper and easier to start and scale a business.

New cloud-based businesses

Companies that leverage the power of the cloud are going to displace those that don’t. Small businesses who use the cloud are over one and a half times more likely to have 10%+ revenue growth than small business in general.

Here are some examples of new types of small businesses that will use the cloud to launch and grow their enterprises:

  • Cloud “plug-ins” are small businesses that take advantage of specific cloud services such as payroll taxes, filings and forms that they can plug into so they can focus on mission critical areas of their business.
  • Cloud “hives” enable businesses to operate with employees working in different locations – or to partner with different companies – and share work and resources more easily.
  • Cloud “kiosks” compete with major firms for business thanks in part to the cloud. Two of the top ten US merger and acquisition advisory firms by deal volume are “kiosk” investment banks, firms with three to five employees that take advantage of cloud capabilities to compete with big banks like Morgan Stanley and JP Morgan.

Benefits driving adoption

Benefits that are driving small business cloud adoption include:

  • Reduced costs. You only pay for the server capacity used
  • Increased efficiency and productivity
  • Better collaboration among colleagues and teams
  • Scale-ability. If you need more capacity, it is available. Or, if your needs taper off, you can adjust the level of service.
  • No need to employ IT staff to look after your data center.
  • Ease of access

Cloud risks

Despite the benefits, some key risks remain; making this unregulated market a bit of a free-for-all for business users. The two main risks that dominate are:

  1. Service interruption, and
  2. Data loss

Service interruption

IT service breakdowns are common and the cloud is no exception. HSB conducted a study with the Ponemon Institute among small to mid-sized businesses that were cloud users, and this is what we found:

  • 48% of business cloud users said their organizations have experienced an interruption in cloud services.
  • 56% reported that at least one of these interruptions prevented their company from even functioning!

Outages happen all the time. If you work in an office, you can probably remember at least a few times your servers have gone down. A big issue is that data centers are not always proactive in addressing the risk of unplanned outages.

This fact is evident in another study conducted amongst data center managers by Emerson Network Power:

  • Only 36% believe they utilize all best practices in data center design and redundancy to maximize availability.
  • And only 41% believe senior management fully supports their efforts to prevent and manage unplanned outages.

Data loss

The second major risk in this market are data breaches, and these are what make the headline news all too often.

One of the reasons thousands of cloud-service companies have entered this market, is the low barrier to entry. If an outage or incident at a cloud provider results in data loss, the contracts are written to give a credit for lost service but typically offer no compensation for data losses.

At this point, no reputable rating service exists for cloud providers. So there is risk, especially if you shop by price, in selecting unproven or unknown cloud data center providers.

Cloud outages in the news

The cloud is not immune to perils. Many cloud providers are not inclined to inform the public or cloud users of cloud outage events, their causes and vulnerabilities.

But cloud outages happen, and as cloud use grows, cloud outages impact more users and some events become news.

The Cloud Security Alliance, a not-for-profit with a mission to promote best practices for cloud computing, analyzed thousands of news articles on cloud vulnerability incidents.

Their analysis revealed that the three most frequent incidents causing cloud outages that made the news were:

  1. Insecure Interfaces & APIs accounted for 29%
  2. Data Loss & Leakage represented 25%
  3. Hardware failure accounts for 10%

Solutions: The silver lining

Clearly, cloud computing is becoming an undeniable growing force in our economy, so it’s a topic we need to comprehend.

As an insurance company, Hartford Steam Boiler is educating ourselves and our clients on cloud issues, exposures and identifying insurable risks. The market research we’ve conducted with the Ponemon Institute has helped us understand and better quantify the concerns and risks of business cloud users.

No one has all the answers yet, but we are working to build our expertise and now have an engineering specialist with data center experience who is developing recommendations to help businesses mitigate the risks of cloud computing.

For more information on coverage for cloud outages, check out HSB TechAdvantage, our latest equipment and technology solution.


© 2016 The Hartford Steam Boiler Inspection and Insurance Company. All rights reserved. This article is for informational purposes only.


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