Cyber risk has become a topic of great importance in today’s risk management and insurance is seen as a powerful means to handle it. However, the actual cyber insurance market is greatly underdeveloped. Challenges in the insurability of cyber risk were identified to be the central impediments to the market growth. This paper investigates potential risk transfer schemes for cyber risk that can improve its insurability and foster market development. The work is the first approach to compare different risk transfer options for cyber risk and test them in a simulation approach. We show that the current market is relatively small and can benefit from the introduction of further risk transfer mechanisms for the primary insurer (e.g., reinsurance and capital market solutions). For extreme scenarios the definition of an insurance pool is an effective approach to foster market development. In worst-case scenarios – for instance a timely restricted information infrastructure breakdown – the active risk transfer by the government (e.g., in form of a governmental backstop) turns to be vital. Minimum self-protection measures are effective to apply in the presence of correlations in insurer’s portfolios.
Institute of Insurance Economics, University of St. Gallen, Working Paper Series on Risk Management and Insurance #184