The supply of cyber risk insurance
Type
conference paper
Date Issued
2024-08-29
Author(s)
Abstract
Cyber risk losses are large and growing, yet the cyber insurance market is small.
What constraints the insurance industry from providing larger capacity for cyber risk?
We argue that while heavy tails and uncertain loss distribution of cyber risk require
significant amounts of external contingent capital, the asymmetric information embedded
in insuring cyber risk makes external capital prohibitively costly. Hence, risk
financing of cyber insurers relies significantly on the internal capital which constraints
its supply. We model the cyber insurance risk financing and then test our arguments
empirically in the context of the US cyber insurance market. Using an exogenous
shock of the non-US affiliated reinsurance tax treatment in 2017, we establish the
causal inference that insurers primarily rely on the internal capital market to supply
cyber risk insurance. Then, we test which of the features of cyber risk contribute to
the cost of external capital and confirm that all of them play a significant role.
What constraints the insurance industry from providing larger capacity for cyber risk?
We argue that while heavy tails and uncertain loss distribution of cyber risk require
significant amounts of external contingent capital, the asymmetric information embedded
in insuring cyber risk makes external capital prohibitively costly. Hence, risk
financing of cyber insurers relies significantly on the internal capital which constraints
its supply. We model the cyber insurance risk financing and then test our arguments
empirically in the context of the US cyber insurance market. Using an exogenous
shock of the non-US affiliated reinsurance tax treatment in 2017, we establish the
causal inference that insurers primarily rely on the internal capital market to supply
cyber risk insurance. Then, we test which of the features of cyber risk contribute to
the cost of external capital and confirm that all of them play a significant role.
Event Title
European Economic/Econometric Association Joint Annual Meeting
Event Location
Rotterdam, Netherlands
Event Date
26. - 30. 08. 2024