Modeling Privacy Insurance Contracts and Their Utilization in Risk Management for ICT Firms

The rapid expansion of Internet based services has created opportunities for ICT firms to collect and use, in an unauthorized way, information about individuals (e.g. customers, partners, employees etc.). Therefore, privacy issues are becoming increasingly important. In this paper we model the risk that an IT firm is exposed to, as a result of potential privacy violation incidents. The proposed model is based on random utility modeling and aims at capturing the subjective nature of the question: ”how important is a privacy violation incident to someone?”. Furthermore, we propose a collective risk model for the economic exposure of the firm due to privacy violation. These models are useful for the design and valuation of optimal privacy related insurance contracts for the firm and are supportive to its risk management process.