Is Accumulation Risk In Cyber Systematically Underestimated?

29 Pages Posted: 9 Feb 2023 Last revised: 12 Apr 2023

See all articles by Gabriela Zeller

Gabriela Zeller

Technische Universität München (TUM)

Matthias A. Scherer

Technische Universität München (TUM)

Date Written: March 30, 2023

Abstract

Many insurers have started to underwrite cyber in recent years. In parallel, they developed their first actuarial models to cope with this new type of risk. On the portfolio level, two major challenges hereby are the adequate modelling of the dependence structure among cyber losses and the lack of suitable data based on which the model is calibrated. The purpose of this article is to highlight the importance of taking a holistic approach to cyber. In particular, we argue that actuarial modelling should not be viewed stand-alone, but rather as an integral part of an interconnected value chain with other processes such as cyber-risk assessment and cyber-claims settlement. We illustrate that otherwise, i.e. if these data-collection processes are not aligned with the actuarial (dependence) model, na\"ive data collection necessarily leads to a dangerous underestimation of accumulation risk. We illustrate the detrimental effects on the assessment of the dependence structure and portfolio risk by using a simple mathematical model for dependence through common vulnerabilities. The study concludes by highlighting the practical implications for insurers.

Keywords: Cyber Risk, Cyber Insurance, Accumulation Risk, Poisson process

Suggested Citation

Zeller, Gabriela and Scherer, Matthias A., Is Accumulation Risk In Cyber Systematically Underestimated? (March 30, 2023). Available at SSRN: https://ssrn.com/abstract=4353098 or http://dx.doi.org/10.2139/ssrn.4353098

Gabriela Zeller (Contact Author)

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

Matthias A. Scherer

Technische Universität München (TUM) ( email )

Arcisstrasse 21
Munich, DE 80333
Germany

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