Cyber-Insurance: Copula Pricing Framework and Implication for Risk Management

In recent years there has been a growing stream of research focusing on cyber-insurance. Risk transference with insurance has been suggested by both practitioners and academics to absorb losses caused by security breaches as well as to supplement the existing set of security tools to manage IT security residual risk after IT security investments are made. In this paper, we investigate pricing of cyber-insurance products using the emerging copula methodology for modeling dependent risks from an actuarial approach which is different to the process approaches of Bohme and Kataria (2006) and Mukhopadhyay et. al. (2006). We discuss a framework for assessing the empirical dollar loss distribution from the empirical distribution of the number of infected computers. We develop a cyber-insurance model and demonstrate the Gumbel copula to price insurance premiums using a numerical example with ICSA data.