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A model to analyze the challenge of using cyber insurance

Author

Listed:
  • Tridib Bandyopadhyay

    (Kennesaw State University)

  • Vijay Mookerjee

    (University of Texas at Dallas)

Abstract

This work analyzes and extends insurance dynamics in the context of cyber risk. Cyber insurance contracts, when used as a means to manage residual cyber risk, could behave differently from other traditional (e.g., property) insurance. One important difference arises from the complexity involved in the post-breach decision of whether and how a firm should optimally plan to claim indemnity in the event of a cyber breach. We define different types of cyber breaches leading to different claiming scenarios, whose roots lie in the impact of secondary loss caused by certain but not all types of breaches. We build a model to capture the impact of secondary loss in structuring the use of cyber insurance and then combine the backward analysis of myriad breach scenarios to derive the overall optimal decision to purchase cyber insurance. We demonstrate that the optimal purchase decision depends on the mix of the types of cyber breaches that a firm faces. Numerical experiments corroborate market observation of limited use of cyber insurance after 20 years from when these products became available.

Suggested Citation

  • Tridib Bandyopadhyay & Vijay Mookerjee, 2019. "A model to analyze the challenge of using cyber insurance," Information Systems Frontiers, Springer, vol. 21(2), pages 301-325, April.
    • Handle: RePEc:spr:infosf:v:21:y:2019:i:2:d:10.1007_s10796-017-9737-3
    DOI: 10.1007/s10796-017-9737-3
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    References listed on IDEAS

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    1. MOSSIN, Jan, 1968. "Aspects of rational insurance purchasing," LIDAM Reprints CORE 23, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    2. Fang Fang & Manoj Parameswaran & Xia Zhao & Andrew B. Whinston, 2014. "An economic mechanism to manage operational security risks for inter-organizational information systems," Information Systems Frontiers, Springer, vol. 16(3), pages 399-416, July.
    3. Gollier, Christian & Pratt, John W, 1996. "Risk Vulnerability and the Tempering Effect of Background Risk," Econometrica, Econometric Society, vol. 64(5), pages 1109-1123, September.
    4. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
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    Cited by:

    1. Hui, Kai-Lung & Zhou, Jiali, 2020. "The Economics of Hacking," MPRA Paper 102706, University Library of Munich, Germany.

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