If there's one thing that scares Australian insurers even more than a macroeconomic downturn or interest rate risks, it's cyber-attacks.
The rise of the internet has brought about numerous advantages and benefits, including making our lives more convenient and businesses more efficient. But more recently, it has also created an enormous threat, as has been highlighted by the numerous hacks and attacks on individuals and corporations which threaten not only our privacy, but also our family's security.
And it's not just smaller businesses at risk. Last year, Sony was hacked (allegedly by North Korea) which disrupted the planned release of its controversial movie, The Interview. Over in the United States, Target was also hacked while, more recently, the hacking of 'extramarital dating' website Ashley Madison has also dominated the news headlines.
As these incidents becoming increasingly common, businesses around Australia – and the rest of the world – are rightfully concerned that they could be next. In fact, the Insurance Banana Skins 2015 report by PricewaterhouseCoopers showed that cyber-attacks have become one of the biggest fears of insurers around the world, while it is the number one risk feared by Australian insurance companies, ahead of macro-economic risks and distribution channels.
It's not difficult to see why, either, considering insurers would be the prime target for hackers and cyber terrorists. Not only do they carry high volumes of people's personal information and credit card details, but a hack would also cause:
- Enormous financial costs;
- Reputational damage;
- Service disruption and;
- Potential legal consequences, as we've seen with Ashley Madison
To highlight how serious this issue has become, the PWC report even quoted the chief financial officer of one non-life company in Australia as saying: "We repel more than 20 serious attacks every day. Half of these we suspect are state-sponsored attacks".
Playing defense
As a result of the serious damage that can be caused by even a minor attack on a company's systems, demand for cyber security has risen to unprecedented levels with a number of Australian companies in the box-seat to benefit.
One such company is Senetas Corporation Limited (ASX: SEN). Senetas provides high-speed data encryption hardware to governments and businesses around the world, designed to protect data between sites rather than just while the data is at rest. Indeed, this is becoming more and more important as data is increasingly being stored 'in the cloud' or at data centres.
Senetas has been awarded NATO Certification, meaning that its encryptos are certified by more leading authorities than any other product of its type. While Senetas' products require little ongoing support requirements, these features also provide a significant barrier to entry for potential competitors.
Although the company's shares have skyrocketed since the beginning of the year, they've retreated in value more recently which could provide long-term investors an excellent opportunity to begin building a position.
Future Fibre Technologies Ltd (ASX: FFT) is another company set to benefit from this trend. The company, which only recently listed its shares on the ASX, develops and manufactures fence-mounted fibre optic perimeter intrusion detection systems which are used for the security of various utilities and important infrastructure (e.g. airports, pipelines, military bases, etc.).
Indeed, this is becoming increasingly important considering the increased threat of terrorism, data intrusion, theft and other attacks around the world. The shares have risen 23% since their debut, but could still be a great bet for long-term investors.
One more company that could be worth a second look is Prophecy International Holdings Limited (ASX: PRO). Prophecy is an international software developer which develops Snare – a network monitoring and analysis tool for which demand has absolutely exploded. New sales grew 250% in the 2015 financial year while revenue from the business surged 127%, with further growth anticipated over the coming years.
Although these companies have already recorded some remarkable gains this year alone, I expect the industry will continue to expand over the coming years as companies around the world increasingly look to protect their systems.
Of course, there are still risks involved with such investments so investors should always ensure to maintain a diversified portfolio, but there could certainly be some great gains still to be made.
