Cyber security insurance can help offset the cost of a data breach and is becoming a standard requirement for many organizations. Depending on the policy, cyber insurance can pay for forensics, defense costs, cyber extortion payments and cover any liability to other organizations.
There are two reasons that an organization may require cyber insurance. First, they may want to be able to collect if your organization has a data breach involving their data, and you are liable. The second is so that your organization can recover from a breach and continue operations, providing them the service. Either or both may be true, and they may ask for specific levels of coverage for each type of event.
They expect that you have cyber insurance with a payment cap no less than the specified amount, but which is enough to pay for recovery after a breach. Both liability and business insurance may be required.