On the Role of Risk Perceptions in Cyber Insurance Contracts

TL;DR

This paper examines how risk perceptions of both insurers and users influence cyber insurance contracts, highlighting how these perceptions can incentivize better cybersecurity investments through a principal-agent model.

Contribution

It introduces a framework modeling risk perceptions with coherent risk measures, extending prior models to include risk-averse users and risk-sensitive insurer perceptions.

Findings

Cyber insurance can incentivize increased system protection.

Insurer's higher risk aversion influences contract design.

Risk perception sensitivity affects user investment decisions.

Abstract

Risk perceptions are essential in cyber insurance contracts. With the recent surge of information, human risk perceptions are exposed to the influences from both beneficial knowledge and fake news. In this paper, we study the role of the risk perceptions of the insurer and the user in cyber insurance contracts. We formulate the cyber insurance problem into a principal-agent problem where the insurer designs the contract containing a premium payment and a coverage plan. The risk perceptions of the insurer and the user are captured by coherent risk measures. Our framework extends the cyber insurance problem containing a risk-neutral insurer and a possibly risk-averse user, which is often considered in the literature. The explicit characterizations of both the insurer's and the user's risk perceptions allow us to show that cyber insurance has the potential to incentivize the user to invest more on system protection. This possibility to increase cyber security relies on the facts that the insurer is more risk-averse than the user (in a minimization setting) and that the insurer's risk perception is more sensitive to the changes in the user's actions than the user himself. We investigate the properties of feasible contracts in a case study on the insurance of a computer system against ransomware.