# Post-Incident Audits on Cyber Insurance Discounts

## TL;DR

This paper develops a game-theoretic model to optimize post-incident audits in cyber insurance, balancing audit costs and deterrence of misreporting security levels, with simulations showing the effectiveness of the approach.

## Contribution

It introduces the first theoretical model for post-incident cyber insurance audits, considering strategic misreporting and optimal insurer auditing strategies.

## Key findings

- Game-theoretic strategies outperform common sense methods in audit decision-making.
- Insurers can effectively deter misreporting with optimized auditing policies.
- Simulations validate the model's practical potential in cyber insurance management.

## Abstract

We introduce a game-theoretic model to investigate the strategic interaction between a cyber insurance policyholder whose premium depends on her self-reported security level and an insurer with the power to audit the security level upon receiving an indemnity claim. Audits can reveal fraudulent (or simply careless) policyholders not following reported security procedures, in which case the insurer can refuse to indemnify the policyholder. However, the insurer has to bear an audit cost even when the policyholders have followed the prescribed security procedures. As audits can be expensive, a key problem insurers face is to devise an auditing strategy to deter policyholders from misrepresenting their security levels to gain a premium discount. This decision-making problem was motivated by conducting interviews with underwriters and reviewing regulatory filings in the U.S.; we discovered that premiums are determined by security posture, yet this is often self-reported and insurers are concerned by whether security procedures are practised as reported by the policyholders. To address this problem, we model this interaction as a Bayesian game of incomplete information and devise optimal auditing strategies for the insurers considering the possibility that the policyholder may misrepresent her security level. To the best of our knowledge, this work is the first theoretical consideration of post-incident claims management in cyber security. Our model captures the trade-off between the incentive to exaggerate security posture during the application process and the possibility of punishment for non-compliance with reported security policies. Simulations demonstrate that common sense techniques are not as efficient at providing effective cyber insurance audit decisions as the ones computed using game theory.