Aggregate Cyber-Risk Management in the IoT Age: <i>Cautionary Statistics for (Re)Insurers and Likes</i>

Abstract

IoT-driven smart societies are modern service-networked ecosystems, whose proper functioning is hugely based on the success of supply chain relationships. Robust security is still a big challenge in such ecosystems, catalyzed primarily by naive cyber-security practices (e.g., setting default IoT device passwords) on behalf of the ecosystem managers, i.e., users and organizations. This has recently led to some catastrophic malware-driven DDoS and ransomware attacks (e.g., the Mirai and WannaCry attacks). Consequently, markets for commercial third-party cyber-risk management (CRM) services (e.g., cyber-insurance) are steadily but sluggishly gaining traction with the rapid increase of IoT deployment in society, and provides a channel for ecosystem managers to transfer residual cyber-risk post attack events. Current empirical studies have shown that such residual cyber-risks affecting smart societies are often heavy-tailed in nature and exhibit tail dependencies. This is both, a major concern for a profit-minded CRM firm that might normally need to cover multiple such dependent cyber-risks from different sectors (e.g., manufacturing and energy) in a service-networked ecosystem, and a good intuition behind the sluggish market growth of CRM products. In this article, we provide: 1) a rigorous general theory to elicit conditions on (tail-dependent) heavy-tailed cyber-risk distributions under which a risk management firm might find it (non)sustainable to provide aggregate cyber-risk coverage services for smart societies and 2) a real-data-driven numerical study to validate claims made in theory assuming boundedly rational cyber-risk managers, alongside providing ideas to boost markets that aggregate dependent cyber-risks with heavy-tails. To the best of our knowledge, this is the only complete general theory till date on the feasibility of aggregate CRM.

Topics & Concepts