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Cyber-Insurance Revisited

Wednesday, January 5, 2005

Abstract

Cyber-insurance is considered as appropriate means to absorb financial losses caused by computer security breaches. Since insurance markets at the same time create incentives to construct more secure systems, they are regarded as particularly desirable tools. However, this paper argues that the typical market structure in IT businesses may thwart the formation of a proper insurance market for cyber-risks: The worldwide dominance of a few system platforms leads to correlated losses, which require premium surcharges and are thus hard to insure. This paper refers to an indemnity insurance model to evaluate the conditions under which coverage for cyber-risks can be granted despite monocultures of installed platforms. Different premiums for users of dominant and alternative platforms are also addressed. Acting as a counterweight to the market leader's strong economies of scale, a cost advantage for users of less widespread platforms could foster a more balanced market structure.

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