text: Abstract We introduce a game-theoretic model to investigate the strategic interaction between a cyber insurance policyholder whose premium depends on her self-reported security level and an insurer with the power to audit the security level upon receiving an indemnity claim. Audits can reveal fraudulent (or simply careless) policyholders not following reported security procedures, in which case the insurer can refuse to indemnify the policyholder. However, the insurer has to bear an audit cost even when the policyholders have followed the prescribed security procedures. As audits can be expensive, a key problem insurers face is to devise an auditing strategy to deter policyholders from misrepresenting their security levels to gain a premium discount. This decision-making problem was motivated by conducting interviews with underwriters and reviewing regulatory filings in the US; we discovered that premiums are determined by security posture, yet this is often self-reported and insurers are concerned by whether security procedures are practised as reported by the policyholders. To address this problem, we model this interaction as a Bayesian game of incomplete information and devise optimal auditing strategies for the insurers considering the possibility that the policyholder may misrepresent her security level. To the best of our knowledge, this work is the first theoretical consideration of post-incident claims management in cyber security. Our model captures the trade-off between the incentive to exaggerate security posture during the application process and the possibility of punishment for non-compliance with reported security policies. Simulations demonstrate that common sense techniques are not as efficient at providing effective cyber insurance audit decisions as the ones computed using game theory.
  @cite_18: High correlation in failure of information systems due to worms and viruses has been cited as major impediment to cyber-insurance. However, of the many cyber-risk classes that influence failure of information systems, not all exhibit similar correlation properties. In this paper, we introduce a new classification of correlation properties of cyber-risks based on a twin-tier approach. At the first tier, is the correlation of cyber-risks within a firm i.e. correlated failure of multiple systems on its internal network. At second tier, is the correlation in risk at a global level i.e. correlation across independent firms in an insurer’s portfolio. Various classes of cyber-risks exhibit dierent level of correlation at two tiers, for instance, insider attacks exhibit high internal but low global correlation. While internal risk correlation within a firm influences its decision to seek insurance, the global correlation influences insurers’ decision in setting the premium. Citing real data we study the combined dynamics of the two-step risk arrival process to determine conditions conducive to the existence of cyber-insurance market. We address technical, managerial and policy choices influencing the correlation at both steps and the business implications thereof.
  @cite_28: 
  @cite_29: Risks faced by information system operators and users are not only determined by their own security posture, but are also heavily affected by the security-related decisions of others. This interdependence between information system operators and users is a fundamental property that shapes the efficiency of security defense solutions. Game theory is the most appropriate method to model the strategic interactions between these participants. In this survey, we summarize game-theoretic interdependence models, characterize the emerging security inefficiencies, and present mechanisms to improve the security decisions of the participants. We focus our attention on games with interdependent defenders and do not discuss two-player attacker-defender games. Our goal is to distill the main insights from the state of the art and to identify the areas that need more attention from the research community.
  @cite_1: 
  @cite_19: We propose a comprehensive formal framework to classify all market models of cyber-insurance we are aware of. The framework features a common terminology and deals with the specific properties of cyber-risk in a unified way: interdependent security, correlated risk, and information asymmetries. A survey of existing models, tabulated according to our framework, reveals a discrepancy between informal arguments in favor of cyber-insurance as a tool to align incentives for better network security, and analytical results questioning the viability of a market for cyber-insurance. Using our framework, we show which parameters should be considered and endogenized in future models to close this gap.
  @cite_23: Managing security risks in the Internet has so far mostly involved methods to reduce the risks and the severity of the damages. Those methods (such as firewalls, intrusion detection and prevention, etc) reduce but do not eliminate risk, and the question remains on how to handle the residual risk. In this paper, we take a new approach to the problem of Internet security and advocate managing this residual risk by buying insurance against it. Using insurance in the Internet raises several questions because entities in the Internet face correlated risks, which means that insurance claims will likely be correlated, making those entities less attractive to insurance companies. Furthermore, risks are interdependent, meaning that the decision by an entity to invest in security and self-protect affects the risk faced by others. We analyze the impact of these externalities on the security investments of users using a simple 2-agent model. Our key results are that there are sound economic reasons for agents to not invest much in self-protection, and that insurance is a desirable incentive mechanism which pushes agents over a threshold into a desirable state where they all invest in self-protection. In other words, insurance increases the level of self-protection, and therefore the level of security, in the Internet. Therefore, we believe that insurance should become an important component of risk management in the Internet.
  @cite_5: Social, technical and business connections can all give rise to security risks. These risks can be substantial when individual compromises occur in combinations, and difficult to predict when some connections are not easily observed. A significant and relevant challenge is to predict these risks using only locally-derivable information.
  @cite_25: Cyberinsurance to cover losses and liabilities from network or information security breaches can provide incentives for security investments that reduce risk. Although cyberinsurance has evolved, industry has been slow to adopt it as a risk management tool.
  @cite_17: 
summary: This paper continues the trend towards rectifying the substantial discrepancy'' @cite_19 between early cyber insurance models and informal claims about the insurance market. Early research considered factors relevant to the viability of a market. Interdependent security occurs when the risk depends on the actions of others'' @cite_17 @cite_29 . Optimists argued that insurers could coordinate the resulting collective action problem @cite_1 @cite_23 , leading to a net social welfare gain and a viable market. Skeptics instead focused on the high correlation in failure of information systems'' @cite_18 @cite_25 @cite_5 , citing it as a major impediment to the supply of cyber insurance. Recent empirical work @cite_28 analyzing 180 cyber insurance filings shows that the cyber insurance market is viable.