Cyber Risk Assessment for Capital Management

TL;DR

This paper proposes a comprehensive two-pillar framework for cyber risk assessment and capital management, integrating risk modeling with strategic capital allocation to improve cybersecurity investments and insurance strategies.

Contribution

It introduces an innovative two-pillar framework combining risk assessment models with capital management strategies for cyber risk, supported by a practical case study.

Findings

Effective cyber risk management requires integrated assessment and capital strategies.

Sensitivity analysis shows the impact of control costs and effectiveness on optimal strategies.

Case study demonstrates the framework's applicability across diverse companies.

Abstract

This paper introduces a two-pillar cyber risk management framework to address the pervasive challenges in managing cyber risk. The first pillar, cyber risk assessment, combines insurance frequency-severity models with cybersecurity cascade models to capture the unique nature of cyber risk. The second pillar, cyber capital management, facilitates informed allocation of capital for a balanced cyber risk management strategy, including cybersecurity investments, insurance coverage, and reserves. A case study, based on historical cyber incident data and realistic assumptions, demonstrates the necessity of comprehensive cost-benefit analysis for budget-constrained companies with competing objectives in cyber risk management. In addition, sensitivity analysis highlights the dependence of the optimal strategy on factors such as the price of cybersecurity controls and their effectiveness. The framework's implementation across a diverse range of companies yields general insights on cyber risk management.