Incident-Specific Cyber Insurance

TL;DR

This paper develops an economic framework for incident-specific cyber insurance, focusing on optimal indemnity design to balance risk transfer and retention for both insurers and buyers, supported by real incident data.

Contribution

It introduces a novel economic model for incident-specific cyber insurance, addressing optimal indemnity design for Pareto efficiency, with practical implementation considerations.

Findings

Framework achieves Pareto optimality in risk sharing.

Real data supports the model's feasibility.

Discussion of practical implementation methods.

Abstract

In the current market practice, many cyber insurance products offer a coverage bundle for losses arising from various types of incidents, such as data breaches and ransomware attacks, and the coverage for each incident type comes with a separate limit and deductible. Although this gives prospective cyber insurance buyers more flexibility in customizing the coverage and better manages the risk exposures of sellers, it complicates the decision-making process in determining the optimal amount of risks to retain and transfer for both parties. This paper aims to build an economic foundation for these incident-specific cyber insurance products with a focus on how incident-specific indemnities should be designed for achieving Pareto optimality for both the insurance seller and buyer. Real data on cyber incidents is used to illustrate the feasibility of this approach. Several implementation improvement methods for practicality are also discussed.