Why does the adverse stock market impact of a security breach reduce the value of buying cyber
Question:
Why does the adverse stock market impact of a security breach reduce the value of buying cyber insurance? Assume that for an e-commerce firm, the stock market loss of breach is estimated at $125,000. A company selects a policy with a deductible of $50,000. Let the direct loss from a breach be such that there is either a Low loss of L (with probability p) a Medium loss of M (with probability q) or a High loss of H (with probability 1-p-q). Assume that the firm is not obliged by law to disclose a breach. The insurer provides the following (traditional) formula to the firm to calculate the premium P(d) based on the deductible, d: P(d) = 1.05 (p ∗ (L − d) + q ∗ (M − d) + (1 − p − q) ∗ (H − d)) The firm estimates L = $100, 000 (with a probability of 0.4), M = $200, 000 (with a probability of 0.4) and H = $600, 000 (with a probability of 0.2).
1. Should the firm claim when the loss is low? Medium? High? Claim if: Claimable Loss from Breach > Deductible + Market Loss.
2. What premium will be charged based on the above formula? Plugging in the numbers, the premium is $199,500.
3. Is this premium fair, or is it overpriced based on the firm's correct claiming strategy?
4. Given the firm's correct claiming strategy, what should the fair premium be?
5. Under the traditional contract, since the firm never claims when the loss is low, is it better to use $100,000 as the deductible?
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill