Insuring Data Risks: Problems and Solutions

The proliferation of valuable data assets and connectivity in the digital economy has been accompanied by intensifying cyber risks. However, systemic constraints including data ambiguities, legal uncertainty, and misaligned incentives have severely limited advancement of cyber insurance coverage relative to rising enterprise protection needs. This research provides a comprehensive analysis of key bottlenecks inhibiting cyber data risk insurability. It examines constraints stemming from historical data deficiencies, risk modeling complexities, opaque controls, and fragmented regulatory regimes. The study also evaluates internal challenges faced by insurers in advancing policies like claims ambiguities, talent gaps, and reliance on primitive actuarial techniques. It further proposes targeted legal, risk management and public-private partnership enhancements that can expand viable transfer of cyber data risks. These include graduated security frameworks, transparent data exchanges, resilience incentives, risk pooling structures and international cooperation. With balanced reforms, cyber insurance can systematically enable enterprises to secure data assets commensurate with their rising economic and societal value.


I. Introduction
The exponential growth of data generation and collection around the world has led to immense economic benefits, but also created novel systemic risks related to data security, integrity, and privacy.Recent years have witnessed an alarming rise in the frequency and impact of cyber incidents targeting organizational and consumer data assets globally.According to emerging loss trends, the average total cost of a data breach has risen to $4.35 million in 2021, representing a nearly 13% year-over-year increase.Experts have attributed these cost escalations to factors like more stringent data protection regulations, the shift to remote work during the pandemic, and the increasing sophistication of threat actors. 1 liability precedents will illuminate gaps in jurisprudence addressing harms like ransomware attacks, systemic data supply chain compromises, and failures of AI systems.Evaluating cybersecurity policy and legal environments across key countries like the United States, China, the United Kingdom, Japan, and members of the European Union facilitates identification of jurisdictional inconsistencies that hinder advancement of cyber insurance recoverability constructs. 5 provide empirical grounding, the research also leverages insurance industry data on cyber premiums, losses, and claims rejection rates across segments like healthcare, retail, manufacturing, financial services, and critical infrastructure.Statistical analysis of longitudinal loss trends enables assessment of aggregations in interconnected portfolios which poses systemic solvency risks for carriers.The quantitative component also entails distributional analysis of cyber insurance penetration and density rates across firm revenue and sectoral categories.This facilitates evidence-based conclusions regarding current coverage adequacies vis-à-vis intensifying cyber risk landscapes organizations face. 6gether, the multi-pronged qualitative and quantitative analyses will provide a comprehensive perspective on limitations in today's data risk protection safety nets.The research synthesizes insights from legal, technical, and insurance vantage points to propose targeted reforms that balance the objectives of expanding insurability while also maintaining stable insurance economics.Recommended enhancements account for constraints stemming from profitability pressures, controls fragmentation, information asymmetries, and misaligned incentives between cyber insurers and their policyholders.7

A. Insuring Data Risks: Problems and Solutions 1. Insurmountability challenges for advancing data risk protection
The intensifying frequency and severity of cyber incidents targeting organizational data assets has highlighted systemic limitations in transferring such emerging risks through conventional insurance constructs.Constraints stemming from historical data deficiencies, legal uncertainty, risk modeling complexities, information asymmetries, and misaligned incentives have severely inhibited underwriting profitability for new age data exposures.Consequently, multiple challenges have arisen in expanding insurability to match the widening protection needs of entities increasingly threatened by cyber-attacks on their sensitive information, networks, and connected technologies.8

Absence of historical actuarial data for novel exposures
Unlike traditional property and casualty risks, the fundamentally new and rapidly advancing nature of cyber data hazards has meant absence of robust historical claims experience data to facilitate pricing and reserving decisions by insurers.For instance, nascent technologies like Internet of Things, artificial intelligence, cryptocurrencies, and quantum computing lack longitudinal loss observations which are prerequisite inputs for actuaries to quantify event likelihoods, severities, and correlations.The clandestine and asymmetric nature of cyber-attacks has also limited forensic visibility into causative factors underlying major breaches, impeding detailed risk Differentiation.The resulting uncertainty has necessitated heavy dependence on subjective expert judgment for cyber risk assessments, leading to volatility in premiums amidst evolving threat landscapes.Such constraints have dampened underwriter confidence in achieving profitable economics over the long-term for data risk covers. 9

Ambiguity in legal liability frameworks
The absence of well-established legal liability precedents and statutory guidelines addressing data security harms has further discouraged insurer capacity for new data risk categories.For instance, jurisprudence remains inconsistent globally in determining organizational duties for preventing different cyberincidents and also calculating resultant damages eligible for victim compensation.Key questions on issues like liability caps, minimum security standards, and accountability thresholds for aggregated or inherited risks within digital ecosystems continue to lack definitive guidance through case laws or regulations in most countries.Such legal uncertainty regarding evolving cyber data harm liabilities has constrained insurers' ability to reliably model maximum loss exposures.It has also increased potentials of litigation against carriers attempting to deny questionable claims after incidents.The resulting profitability concerns have constrained advancement of cyber risk solutions for emergent data vulnerabilities. 10

Complexity in modeling systemic risks
The increasing interconnections between entities and technologies in modern digital environments has exponentially amplified systemic contagion and cascading implications from cyber-attacks on particular data assets.However, the complexity in modeling butterfly effects and risk correlations across IT networks, cloud service dependencies, and automated software ecosystems poses significant challenges for underwriters.Actuarial techniques traditionally relied upon to quantify aggregation risks for natural catastrophes, financial crises, and other systemic loss events remain primitive when it comes to cyber data exposures.Difficulties in tracing causations across incidents and lack of shared historical data further impedes insurers' ability to simulate sufficient stress test scenarios to capture systemic data breach risks.Consequently, major global cyber events entailing billions in economic costs like the 2017 NotPetya and the 2020 SolarWinds attacks highlighted catastrophic protection gaps even for organizations with seemingly adequate cyber. 11

Limited transparency into cyber controls
The largely intangible nature of data assets and their security has meant customer cyber risk profiles perceived by underwriters during policy issuance often diverge from actual risk levels leading to incidents down the road.Unlike physical property risks, constant changes to enterprise IT environments and governance frameworks make it difficult for insurers to monitor ongoing efficacy of cybersecurity controls within policyholders' systems.Current cyber insurance processes also rely heavily upon self-reported controls questionnaires which can suffer from subjectivity and disclosures gaps due to confidentiality concerns or misaligned customer incentives.Resulting information asymmetries and adverse selection risks contribute to carriers struggling to accurately price policies ex-ante relative to actual cyber risk levels.This necessitates conservative underwriting to protect profit margins amidst opaque cyber data environments at customers. 12hile risk-based premiums tied to auditable cybersecurity frameworks can partly help overcome limited transparency challenges, inconsistencies in existing compliance certification regimes also constrain underwriting progress.Except select sectors like finance and healthcare, most industries currently lack mandated baseline cybersecurity standards and supervision processes globally.Voluntary frameworks like ISO 27001, NIST CSF, and CSA STAR provide useful but fragmented guidance focused on limited control dimensions.And certification schemes like SOC 2 and the European Data Protection Seal remain young with variable assessment rigor and adoption outside niche sectors so far.Such gaps in standardized cybersecurity benchmarks hinder insurers' ability to assess relative risk levels across customers and reward improved controls through coverage terms.It thereby restricts advancement of affirmative and graduated cyber insurance solutions. 13

Financial constraints for potential victims
The significant upfront investments needed to assess, implement, and sustain adequate cybersecurity protections remain out of reach for many small and midsized organizations which nonetheless face similar data breach risks like larger entities.At the same time, the considerable costs involved in post-incident responses including legal liability settlements, regulatory fines, technical recovery, and reputational damage repairs also often exceed the limited balance sheet capacities of smaller firms.However, current market dynamics disincentivize insurers from offering comprehensive and affordable cyber covers for such customers due to concerns about moral hazard risks exacerbating claims costs.The resulting protection gaps leave such organizations highly vulnerable to even survive existential data security events.Their residual exposures also contribute to the aggregations risks in insurers' portfolios. 14

Low incentives for proactive cyber risk management
The pricing dynamics in the cyber insurance market today focuses overwhelmingly on indicators like company sizes, revenues, and past breach incidents when assessing customers' risk levels.However, this fails to provide sufficient differentiation for policyholders' widely varying internal cybersecurity maturity.There are limited incentives or credit for organizations proactively minimizing risks through measures like vulnerability testing, IT infrastructure upgrades, and employee training which could significantly reduce insurers' loss exposures.As a result, many enterprises just seek to transfer residual risk through insurance rather than prioritizing continuous cyber risk reduction -creating moral hazard costs for underwriters.The lack of partnerships between carriers and policyholders in cyber risk mitigation thereby remains a key barrier to growth in cyber insurance protections. 15

Reluctance sharing confidential data
Organizations are often justifiably reluctant in providing detailed forensics on previous breaches or complete network architectures to external parties including cyber insurers during policy procurement, due to concerns over reputation, liability, and further data security risks from potential confidential data leakage.However, such disclosures constraints significantly impede underwriters' ability to accurately evaluate customers' cyber risk postures and exposures.It necessitates them to depend on limited self-reported controls details and generic sectoral risk assumptions flowing insufficient risk segmentation granularity in pricing.The resulting adverse selection risks require insurers to utilize conservative underwriting standards to protect profitability, thereby hindering access to adequate and affordable cyber data risk transfer solutions for many customers. 16

Jurisdictional inconsistencies in liability awards
Current legal landscapes related to cybersecurity duties, liabilities, and victim compensation remain highly fragmented across different countries globally.Local laws, regulations, case law precedents, and sectoral compliance mandates leading to material inconsistencies in interpreting organizational accountability and awarding damages after major data breaches.For instance, privacy violation penalties in Europe GDPR framework can go up to 4% of global revenues while the US healthcare sector sees significantly higher legal settlements under HIPAA regulations compared to other industries for compromised personal health data.Such jurisdictional variabilities in liability outcomes significantly complicates reliable estimation of the cyber claims costs distributions and maximum possible exposures for global insurance carriers.It thereby necessitates localization constraints on underwritten cyber insurance limits provided in respective markets to avoid catastrophic losses. 17

Lack of cyber underwriting expertise
The profound technical complexities and rapidly evolving nature of cyber risk landscapes have greatly limited the availability of insurance talent with adequate expertise to perform advanced data risk modeling, underwriting, and claims handling.The niche nature of the exposures and confidentiality constraints has also hindered detailed sharing of historical breaches data further dampening opportunities for actuaries to hone skills through on-the-job learning or classroom trainings.High turnover rates for existing cyber underwriters attracted to new startups or technology vendors have further depleted incumbents' internal talent pools and loss data repositories further.Without concerted public-private investments in cyber insurance knowledge ecosystems, the talent bottlenecks are likely to persist as a key barrier to growth in risk-based underwriting capacities across the industry. 18

Insurer limitations in closing coverage gaps
While systemic constraints like data ambiguities and legal uncertainties have dampened underwriter risk appetites, insurers also face internal challenges in their ability to close emerging cyber data protection gaps.Factors including limited loss assessment capabilities, risk aggregation issues, reinsurance dependencies, and channel incentive misalignments have further contributed to gaps between intensifying enterprise cyber risks and coverages currently offered in the market.A holistic examination of cyber insurance dynamics must synthesize both external ecosystem bottlenecks and internal carrier capability constraints to identify solutions for expanding data risk insurability. 19

Constraints on breach loss assessments
A key prerequisite for insurers in paying out claims is precise estimation of covered losses suffered by the policyholder organization from a cyber-attack.However, accurately attributing impacted business income across integrated systems, untangling event causation sequences across incidents, and isolating insured peril factors from broader management failures often proves complex for cyber-attacks.Data integrity challenges also arise in validating compromised records volumes when determining costs like customer notification expenses and legal liability exposures after large-scale breaches.Such ambiguities in quantifying covered cyber incident damages increase disputes between policyholders and carriers leading to delays or claim denials that exacerbate protection gaps even for entities with active cyber insurance covers.20

Premium controls and risk appetite limitations
As profit-driven entities, insurers have to maintain disciplined risk appetites and underwriting standards aligned loss assessment capabilities, capital buffers, and reinsurance availabilities regardless of wider market dynamics.However, the absence of mandated cybersecurity baselines and intensifying regulatory pressures constrains carriers' ability to raise premiums adequately relative to deteriorating cyber risk landscapes and inflating breach costs.Resulting constraints on underwriting capacities increase exclusions and conditionalities within cyber policies, magnifying gaps in coverages relative to enterprise cyber risk spectrums.Without balanced public-private partnerships to enhance safety nets, such insurer constraints will persist as barriers to insurability expansion.21

Cyber risk interconnections and aggregations
The highly interconnected digital ecosystems in modern economies greatly magnify systemic contagion and cascading implications from cyber-attacks focused on particular high-value data targets.However, most insurers have limited visibility into the dependencies and risk correlations across their policyholders to reliably estimate aggregations potential.The predominant firm-level underwriting techniques also fail to model or price risks flowing across interconnected entities.The resulting exposure underestimations became evident in the wide-scale business interruptions and losses triggered across sectors by systemic hacks like NotPetya, Colonial Pipeline and SolarWinds even when individual companies had cyber coverage.22

A. Addressing such Data Contagion Risks Necessitates Fundamentally
New Cyber Risk Pooling and Diversification Approaches.

Reliance on reinsurance support
Most insurers aim to transfer portions of their concentrated cyber risk exposures to secure capacitive and economic stability through reinsurance markets.However, ambiguities in cyber data and systemic risk models also constrain the risk appetites of reinsurers to back untested exposures at competitive costs.Their support is also contingent on primary carriers implementing sufficient underwriting controls. 23

Industry fragmentation and risk pooling barriers
The cyber insurance sector today remains highly fragmented with the top 10 carriers accounting for less than 60% of the global market share.The absence of centralized data repositories and risk analytics capabilities makes most insurers dependent on their own experience which remains limited compared to aggregate industry loss footprints.Such fragmented risk visibility and modeling capabilities reduce insurers' ability to diversify exposures through risk pooling and hinders advancement of policies tailored to distinct customer segments.It also allows adverse selection risks to manifest when high-risk entities are able to circumvent controls by moving across different underwriters. 24

Channel incentive misalignments on cyber insurance
While insurers aim for cyber risk reduction and resilient underwriting, channels like brokers and agents are still incentivized predominantly to maximize policy sales which may not align with enhanced customer cybersecurity.Gaps also exist between chief information security officers seeking security advances and chief financial officers focused on securing budget efficiencies.Such misalignments contribute to continued reactive purchasing of cyber policies for residual risk transfer rather than proactive risk reduction.It necessitates publicprivate collaborations to create ecosystems wherein cyber insurers become trusted partners to their policyholders rather than just vendors of protection products. 25

Dependence on reactive security signals in underwriting
Currently, most cyber underwriting reliance heavily on indicators like past breach incidents, total data stores, and revenue sizes to categorize customers into risk segments.However, markers of policyholders' forward-looking security postures like controls efficacy improvements, vulnerability management, and cyber hygiene rarely factor into pricing models.This limits the value insurers can provide in strengthening cyber resilience.It also hampers risk reflection, as entities with similar histories but widely differing control frameworks are treated homogenously in underwriting assessments.Tight partnerships to allow underwriters continuous visibility into clients' changing risk exposure levels are critical to advancing cyber insurance protections. 26

Coverage constraints for emergent technology risks
While cyber risks from emerging technologies like cryptocurrencies, Internet-of-Things, and augmented reality platforms are rising, insurers have been constrained in developing dedicated solutions to adequately transfer such exposures.Challenges like the anonymity and irreversibility of blockchain transactions, systemic risks of coordinated edge device hacks, and liability ambiguities for failures in AI systems have made reliable underwriting difficult.However, abrupt regulatory shifts like the EU AI Act necessitate urgent enhancements in insurability frameworks to foster innovation in such technologies responsibly.Constructive public-private dialogues to balance risk management and tech advancement objectives are vital to manage uncertainties. 27

Advancing legal & risk management frameworks
While systemic constraints have contributed to cyber insurability gaps, constructive evolution of risk management and regulatory regimes can help strengthen the overall data protection ecosystem.A collaborative approach is needed between public and private sector stakeholders to implement targeted reforms that motivate proactive security while also enabling viable risk transfer solutions. 28

Stratify controls standards tied to liability caps
An internationally coordinated public-private initiative can establish graduated cybersecurity frameworks tuned to different industry contexts with embedded liability caps tied to certified tiers of controls efficacy, resilience testing, and executive accountability.Such frameworks can mandate baseline data security standards for organizations based on risk profiles while capping liabilities for certified firms meeting advanced control requirements.This balances the objectives of improving protections and providing legal certainty for entities 26  proactively managing risks.Indexed liability caps also offer insurers a reliable mechanism to model maximum exposures at underwriting.29

Mandate disclosures for priority sectors
Regulations can mandate expedited and detailed disclosures of cyber incidents as well as periodic transparency reports on security protocols effectiveness for public and private firms in critical infrastructure sectors.Clean information sharing channels with trusted government agencies can be reciprocated through intelligence warnings, sans legal penalties.Such transparency frameworks targeted to priority sectors with systemic risks can aid better loss by insurers while also improving oversight of cyber hygiene.Policymakers must however adopt strong confidentiality safeguards and liability shields to secure buyin from enterprises. 30

Develop cyber risk data exchanges
Industry associations can establish anonymized pools of historical incident data enriched with cyber control efficacy signals and technology audit benchmarks.Structured data taxonomies and consistent reporting templates will be key to enhancing model value.Strict access controls for participants like accredited insurers, reinsurers, brokers and vetted third-party cyber auditors can be instituted, alongside multiparty confidentiality agreements.Such credible cyber risk data exchanges can significantly improve loss model reliability while also providing technology benchmarking visibility for enterprises. 31

Incentivize cyber resilience certification
Governments can subsidize adoption of advanced cyber resilience and infrastructure stress testing certification schemes aligned to established technical standards like the Cyber Resilience Review process.Cost offsets for small businesses to undertake virtual CISO-led reviews, penetration testing, cyber range simulations etc can be tied to mandatory public disclosures to create transparency market signals incentivizing tech robustness.Such resilience certifications can inform graduated pricing and accumulated risk management by insurers for enterprises going beyond barebones compliance. 32

Promote data integrity validation techniques
Industry consortiums can design blockchains, distributed ledgers and immutable data stores for multi-party recording of sensitive transactions, data transfers and system access logs across public-private ecosystems.Consensusbased integrity validations will enhance forensic visibility and attribution for cyber-attacks.It will also enable reliable data damage quantification for insurers post incidents.metadata can be shared securely with cyber insurers to aid analytics.Policymakers will need to reform dated record retention and liability rules to enable adoption. 33

Standardize cybersecurity legal expertise
Associations of cyber insurers, attorneys, forensic investigators and technology auditors can institute standardized professional education programs, certifications, ethical codes, and continuing expertise mandates.Such accreditation frameworks can accelerate capacity building for global cybersecurity jurisprudence, contracts, and evidence management.It will foster professional standards needed for modern cyber litigation and insurance claims assessments.Public-private centers of excellence can also be set up to train investigators and prosecutors on pursuing cybercrime. 34

Distinguish state-sponsored threat liability
International public-private taskforces consisting of law enforcement, intelligence, and industry experts should aim to formulate precise definitions and tests for distinguishing cyber-attacks with nation-state backing versus criminal threats.A high evidentiary standard like beyond reasonable doubt should be set for any exclusions from cyber policies, along with mandatory conciliation before disputes.This will balance underwriting viability with policyholder protection against arbitrary cyberwar attribution by insurers after commonplace incidents. 35olicymakers should assess models like the US Terrorism Risk Insurance Program which created a public-private risk pool along with a temporary government reinsurance backstop to expand insurability for a systemic and ambiguous emerging threat category.Similar national cyber risk diversification structures can help build out cyber insurance capacity until private reinsurance markets mature.Mandatory cross-border participation can also aid global stability.Such pooling mechanisms can be funded through levies on firms based on revenues, cyber maturity levels and criticality. 36

Explore cyber reinsurance treaties
Global associations of insurers and reinsurers should explore feasibility of pandemic-style systemic risk treaties for catastrophic cyber-attacks or threat scenarios like cyber BI events or infrastructure grid failures impacting interconnected economies.Pooled buffer capital reserves can be maintained in special purpose vehicles domiciled neutral jurisdictions, invested safely to sustain claims.Pre-agreed thresholds and trigger tests will need to be formulated through open industry dialogues.While complex, such multi-country solidarity mechanisms are vital to improving cyber resilience safety nets. 37

Conclusion
The proliferation of data generation and connectivity in the digital economy has been accompanied by systemic risks from cyber-attacks targeting organizational information assets, technologies, and network interactions.However, examination of the cyber insurance sector that has emerged to transfer such risks highlights significant constraints in expanding protection to match intensifying enterprise exposures.Limitations including ambiguities in new age risks like AI and cryptocurrencies, legal uncertainty regarding evolving cyber harms, opacity of policyholders' controls, systemic contagion across interconnected entities, and misalignments of incentives have severely inhibited underwriting profitability and capacity for comprehensive cyber data risk transfer solutions.
At the same time, internal constraints like claims assessment challenges, dependence on primitive actuarial models, capital limitations, and fragmented data access have also hampered insurers' ability to keep pace with rapid risk advancements.Public-private collaborations are imperative to implement targeted legal and risk management reforms that can expand cyber insurability while also maintaining stable insurance economics.Introducing graduated frameworks that mandate minimum controls for organizations based on risk profiles while capping liability for proactive adopters can incentivize cyber resilience.Focused transparency mandates for critical infrastructure sectors, development of anonymized cyber risk data exchanges, and certification of cybersecurity legal expertise will also foster more accurate underwriting and claims assessments.
Exploring innovative risk pooling structures akin to terrorism insurance programs can enable diversification of ambiguity laden systemic risk concentrations currently constrained by individual insurers' balance sheet and data limitations.And international initiatives to formulate precise definitions and evidentiary thresholds for narrow cyberwar exclusions are needed to prevent disputes over arbitrary attribution of state sponsorship to commonplace attacks.Of course, care must be taken to ensure regulatory interventions balance prescriptiveness with flexibility for insurer innovation.And public backstops or subsidies should only temporarily fill critical gaps rather than clouding market discipline.But thoughtful cooperation to enhance cyber protection ecosystems will be vital as the global economy enters an era of unprecedented data interconnections and vulnerabilities.This research study provided a detailed analysis of key bottlenecks inhibiting advancement of cyber data risk insurability and examined potential legal, policy, governance, and partnership interventions that can systematically address the constraints.Significant opportunities exist for synergistic capacity building across insurers, regulators, enterprises, technology vendors and research institutions to enable adequate risk transfer solutions commensurate with the growing role of data as an economic asset requiring robust security.The proposed roadmap encompassing graduated control standards, transparent data exchanges, proactive resilience incentives, enhanced forensics, risk pooling structures and international cooperation provides constructive pathways.Of course, further actuarial, empirical, and experimental research will be essential to refine approaches balancing risk management and innovation within unique jurisdictional and industrial realities across the world.
But collective action is clearly needed to reform outdated paradigms and enable expanded insurability for enterprises seeking security commensurate with the valuable data entrusted to them by customers, regulators and partners.This study also reiterates that managing cyber data risks fundamentally necessitates a shared responsibility paradigm.Insurers must strengthen partnerships with policyholders to reward proactive protection, regulators must mandate baseline controls without stifling markets, and enterprises must invest in resilience rather than just insurance.With collaborative action, cyber risk protection frameworks can keep pace with the exponential advancement of data as a strategic economic