We’ve reported extensively on the challenges of the cyber insurance industry in modeling systemic risk and the related accumulation risk (insurance risk of multiple, unanticipated claims from the same or related events, such as a large cyber attack.)
InsuranceERM, a provider of news and information on insurance and risk, suggests the industry is using a fundamentally flawed approach to modeling systemic risk. A better way to understand the ramifications of a catastrophic attack is to start at the macro level using Modern Financial Theory (MFT), long a tool of Wall Street, government and academic analysts.
“MFT suggests, and we believe, that cyber risk is a systematic market risk; not a typical insurance risk, which is commonly nonsystematic. Cyber risk can be insured, but not using standard insurance actuarial approaches. If we are correct, cyber risk has been mischaracterised as an insurance risk when it is, in fact, a market risk essentially requiring market-based risk management solutions outlined in this article.”
In our opinion, this approach will become more common as insurance-linked securities (ILS) and third-party capital become a more important part of the cyber re/insurance market.
Read the thought-provoking report here.