Demand for cyber insurance continues to exceed available coverage capacity as a result of significant challenges to established actuarial methods and the need to provide sufficient risk capital. Parametric insurance solutions, offering fast and flexible compensation based on predetermined payment schemes and (usually) publicly observable indices, can reduce underwriting costs and mitigate information asymmetry. This provides an avenue for narrowing the cyber protection gap by supplementing sophisticated indemnity insurance products with parametric coverage, lowering undesirable limits and supplying immediate funds to mitigate damages of cyber incidents. However, while being a worthwhile addition to risk transfer options, the necessity of providing an index able to suitably approximate the true impact of cyber events, the large basis risk present for heavy-tailed, non-stationary loss distributions, and the danger of accumulation risk limit parametric insurance’s ability to cover certain parts of cyber risk. To support the implementation of parametric cyber contracts and discuss their potential in view of the present insurance gap in a meaningful way, current literature on the nature, insurability, and assessment of cyber risk is reviewed. Building upon these results, an existing actuarial framework for modeling indemnity insurance is extended to include index-based compensation. The proposed approach is visualized via a simulation study on data breaches and cloud outages.     «

Demand for cyber insurance continues to exceed available coverage capacity as a result of significant challenges to established actuarial methods and the need to provide sufficient risk capital. Parametric insurance solutions, offering fast and flexible compensation based on predetermined payment schemes and (usually) publicly observable indices, can reduce underwriting costs and mitigate information asymmetry. This provides an avenue for narrowing the cyber protection gap by supplementing sophi...     »