Data Breach CAT Bonds: Modeling and Pricing

Maochao Xu and Yiying Zhang

North American Actuarial Journal, 2021, vol. 25, issue 4, 543-561

Abstract: Data breaches cause millions of dollars in financial losses each year. The insurance industry has been exploring the ways to transfer such extreme risk. In this work, we investigate data breach catastrophe (CAT) bonds via developing a multiperiod pricing model. It is found that the nonstationary extreme value model can capture the statistical pattern of the monthly maximum of data breach size very well and, in particular, a positive time trend is discovered. For the financial risks, data-driven time series approaches are proposed to model the complex patterns exhibited by the financial data, which are different from those in the literature. Simulation studies are performed to determine the bond prices and cash flows. Our results show that the data breach CAT bond can be an attractive financial product and an effective instrument for transferring the extreme data breach risk.

Date: 2021
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DOI: 10.1080/10920277.2021.1886948

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