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Post-incident audits on cyber insurance discounts

Post-incident audits on cyber insurance discounts

Panda, Sakshyam, Woods, Daniel W, Laszka, Aron, Fielder, Andrew and Panaousis, Emmanouil ORCID: 0000-0001-7306-4062 (2019) Post-incident audits on cyber insurance discounts. Computers and Security, 87:101593. ISSN 0167-4048 (doi:https://doi.org/10.1016/j.cose.2019.101593)

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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.

Item Type: Article
Uncontrolled Keywords: cyber security, cyber insurance, game theory
Subjects: Q Science > QA Mathematics > QA75 Electronic computers. Computer science
Faculty / Department / Research Group: Faculty of Liberal Arts & Sciences
Faculty of Liberal Arts & Sciences > Department of Computing & Information Systems
Faculty of Liberal Arts & Sciences > Internet of Things and Security (ISEC)
Last Modified: 28 Oct 2019 10:24
Selected for GREAT 2016: None
Selected for GREAT 2017: None
Selected for GREAT 2018: None
Selected for GREAT 2019: None
URI: http://gala.gre.ac.uk/id/eprint/25836

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