Cyber Insurance and Post-Breach Services: A Normative Analysis

Wendy Hui (wendy.hui@singaporetech.edu.sg), Kai-Lung Hui and Wei T. Yue (wei.t.yue@cityu.edu.hk)
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Wendy Hui: Singapore Institute of Technology, Singapore 138683
Wei T. Yue: Department of Information Systems, College of Business, City University of Hong Kong, Kowloon Tong, Hong Kong

Service Science, 2024, vol. 16, issue 2, 124-141

Abstract: Cyber insurance is becoming an essential tool for managing cybersecurity risks. In this study, we analyze how having the option to subscribe to cyber insurance services affects firms’ risk prevention and mitigation decisions. We model the scenario where the firm purchases cyber insurance in a competitive insurance market and compare it against the case when it does not purchase cyber insurance. When there is a breach, cyber insurance can help cover mitigation expenses and breach losses. Consistent with the prior literature, we find that in most cases cyber insurance exacerbates ex ante moral hazard by decreasing expected risk prevention. However, it enhances ex post efforts by increasing expected risk mitigation, which can lead to more positive outcomes for the insured firm. The mechanism involves designing the contract with a delicate calibration of the coverage of breach losses and the coinsurance rate. Moreover, the findings highlight the importance of a healthy risk mitigation service market in managing cybersecurity risks.

Keywords: risk management; risk prevention; post-breach risk mitigation; cyber insurance; insurance coverage (search for similar items in EconPapers)
Date: 2024
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