Technology briefing: cloud computing - what are the risks?

What is 'cloud computing'?

Providers of cloud computing services "rent" technology infrastructure to companies, as and when they need it. As data grows, and computing and storage needs increase, companies pay cloud providers based on how much service they use, instead of investing in more of their own servers, adding new software or growing their technology workforce.

There are three main service models for cloud computing:

• IaaS (Infrastructure as a Service): In the most basic service model, companies can buy access to processing, storage, network and other computing infrastructure.
• SaaS (Software as a Service): In this popular model, users access software in a web browser, rather than having to buy and manage their own software.
• PaaS (Platform as a Service): The PaaS model is targeted at application developers. Cloud providers offer web-based platforms - along with a range of tools - that allow developers to develop and test applications.

What are the key exposures involved in cloud computing?

When you sign up with a cloud computing provider, you are turning over some of your functions and/or data to people who don't work for you. However, your legal obligations do not all go away simply because you have contracted out services.

Risk 1: Lack of access

Perhaps the biggest risk is that you are placing your data, operational processes or technological capability in the hands of others. If something happens to the cloud provider's equipment or the business suddenly closes its doors, how will you continue to operate?

Risk 2: Security as a low priority

Many cloud providers do not see security as a key component of their business model. The way that some companies often end up contracting for cloud services adds to the risk. Rather than a uniform, high-level decision made by corporate leaders with appropriate scrutiny of all issues, in many companies end users arrange their own cloud computing use.

Risk 3: "Take it or leave it" contracts

Cloud computing service agreements are often pro-vendor and may lack adequate protection for cloud users. If you seek modifications of the cloud provider's contract, you may be told to "take it or leave it". Nonetheless, contracts should always be reviewed and assessed for exposure to risks.

Risk 4: Legal compliance

Contracting for computer cloud services does not transfer the primary obligation for compliance from your company to the cloud providers. Ultimately, you are responsible for your company's legal obligations, whether to customers or regulators. Your risk can be managed contractually but your legal obligations are not all eliminated or transferred.

How can you manage these risks?

One way to mitigate risk is to implement the same level of due diligence that you would in making any other contracting decision.

1. Make sure that the right people - such as technology experts, risk managers and lawyers - in your organisation are assessing the risk, evaluating the cloud provider's services, and mitigating exposures through contractual provisions, including use of indemnity and transferring liability.
2. Decide within your organisation what data to send to the cloud, what data should be maintained in-house, and how to back up and archive all data for disaster recovery planning purposes and regulatory compliance.
3. Make sure once your contract is in place that someone actively manages it, monitoring performance and requiring compliance with contract provisions, including service level agreements.
4. Work closely with your broker and insurer to understand your insurance coverage. Cyber risk policies typically protect you from the cost of losses that your customers incur because of technology problems you encounter, such as transmission of viruses, denial of service or disclosure of private information.
5. Take care to have well-documented compliance.

As the economies of scale continue to grow, it is likely costs will fall and reliability and security standards will improve making cloud computing ever more attractive to a wider range of business models and the growth trend in the take up of cloud computing will continue for the foreseeable future.

Sarah Hewitt is a director in the Major Risks Practice of Gallagher. Sarah is the Technology Practice Leader, specialising in the development and management of risk and insurance solutions for organisations in the sector.

Craig Mounser is a senior underwriter for the Travelers Insurance Company's technology practice, specialising in providing insurance and risk management solutions for IT, telecommunications, electronics and medical technology companies.