The barriers to sustainable risk transfer in the cyber-insurance market

Abstract: Smooth risk transfer is a key condition for the development of an insurance market that is well-functioning and sustainable. The constantly evolving nature of cyber-threats and lack of public data sharing means the economic conditions required for quoted cyber-insurance premiums to be considered efficient are highly unlikely to be met. This paper develops Monte Carlo simulations of an artificial cyber-insurance market and compares the efficient and inefficient outcomes based on the informational setup between the market participants. The existence of diverse loss distributions is justified by the dynamic nature of cyber-threats and the absence of any reliable and centralised incident reporting. We show that the limited involvement of reinsurers when loss expectations are not shared leads to increased premia and lower overall capacity. This suggests that the sustainability of the cyber-insurance market requires both better data sharing and external sources of risk tolerant capital.