Cyber: Modelling for a fast-moving risk

Moody’s Damini Mago discusses how advances in cyber modelling can help the market navigate rapidly evolving risks.

In December 2023, the Swiss Insurance Association (SIA) announced findings gathered from a new cyber risk model project, developed in conjunction with Moody’s RMS, around the state of the cyber insurance market in the country and the potential risk that cyber poses for nearly 350,000 business clients.

Like most countries, the growth opportunities for cyber insurance in Switzerland are significant. According to the SIA, just over 7 percent of companies in the country are insured against cyber attacks. If a 1-in-100-year cyber event happened, the protection gap would be around 90 percent of a €2.6bn total economic loss.

There is a significant need to close this wide protection gap – a common theme across many countries – and growing demand from businesses for cyber insurance coverage. But there is also caution from insurers about taking advantage of a market opportunity with limited loss experience and a dynamic, fast-changing risk.

In a chaotic risk landscape such as cyber, understanding tail risk is a critical focus area to bring confidence in understanding systemic risk to better price and account for accumulations. And unlike natural peril risks, cyber risks cannot be diversified simply through geographical spread due to their complex correlation structures.

Moody’s has been modelling cyber risk for insurers for almost 10 years, and with the recently released Moody’s RMS™ Cyber Solutions Version 8, we are moving in line with the needs of the cyber insurance market.

Version 8 facilitates the inclusion of a broader range of scenarios, expanding the diversity of events to attain a deeper understanding of the correlations that may impact pricing and aggregation. The number of unique events catalogued in our model solutions has doubled to more than 20,000 across the different cyber perils.

This event catalogue expansion brings the potential for further diversification within portfolios, helps to enhance decision-making support and risk transfer processes, and provides the foundations for improved event response. This represents a first step towards achieving diversification in cyber risk management or assessing correlations in ILS investor portfolios.

As the threat and digital landscape constantly change, Moody’s is continuing to advance model sophistication, building on the advanced framework to model cyber risk developed for contagious malware and ransomware, furthering how we model other perils such as cloud outages alongside integrating significantly more data and expertise to reduce uncertainty.

Another area of deep research and investment for Moody’s includes impacts such as business interruption and navigating the unknown by exploring the anatomy of cyber tail risk.

In addition, Moody’s is also assessing emerging threats and new scenarios as they relate to existing perils to ensure model completeness and a diverse suite of events.

Given that it remains challenging for many insurers to collect basic exposure data, such as company size, industry and geographical location, Moody’s is also enhancing exposure data quality so clients can fully capitalise on our advanced risk modelling. Our cyber solutions help address this by utilising a portion of Moody’s Orbis dataset that covers approximately 19 million companies worldwide with revenues over $1mn.

To help insurers move forward with market growth opportunities, one of our goals is to help model users uncover potential correlations that might influence pricing and risk aggregation by delving deeper into the data and broadening the range of modelled events. Moody's aims to provide a detailed – yet understandable – scenario framework, acknowledging the complexity of the cyber ecosystem.

Working with government agencies and the insurance industry has been key to Moody’s advancement in cyber risk modelling and helping support the growth of the cyber insurance market.

With initiatives like Moody’s Cyber Risk Steering Group, we strive to level up cyber risk modelling to the same standards the industry experiences with nat cat perils. We aim to achieve a level of sophistication combined with powerful, but easy-to-use functionality that can make sense of this ever-changing risk landscape, to capitalise on growth opportunities and close significant protection gaps for businesses in Europe and worldwide.

Damini Mago, associate director – cyber product management, insurance solutions, Moody’s