The supply of cyber risk insurance

Tuesday, 29 October 2024

3:30 PM- 5:00 PM

Venue: Gaia Lecture Theatre 5 (#ABS-02-LT5) 

Chairperson: Asst Prof Jinggong Zhang

Abstract

Cyber risk losses are large and growing, yet the cyber insurance market is small. What constraints the insurance industry from providing larger capacity for cyber risk? We argue that while heavy tails and uncertain loss distribution of cyber risk require significant amounts of external contingent capital, the asymmetric information embedded in insuring cyber risk makes external capital prohibitively costly. Hence, risk financing of cyber insurers relies significantly on the internal capital which constraints its supply. We model the cyber insurance risk financing and then test our arguments empirically in the context of the US cyber insurance market. Using an exogenous shock of the non-US affiliated reinsurance tax treatment in 2017, we establish the causal inference that insurers primarily rely on the internal capital market to supply cyber risk insurance. Then, we test which of the features of cyber risk contribute to the cost of external capital and confirm that all of them play a significant role.

About the Speaker

Martin Eling is the Dean of the School of Finance, Director of the Institute of Insurance Economics and Professor for Insurance Management at the University of St. Gallen. He is doing empirical research in the intersection of insurance business, economics, and mathematics. Among other activities, he is board member of Concordia, one of Switzerland’s largest health insurance companies.