Insuring Big Losses Due to Security Breaches through Insurance: A Business Model

Security breaches deter e-commerce activities. Organizations spend millions of dollars on security appliances to make online transactions more secure. Nonetheless, a new virus or a clever hacker can easily compromise these deterrents and cause losses of millions of dollars annually. To reduce the impact of such losses, e-risk insurance is a viable complement to the security devices. Currently, e-risk insurance is in its developmental stage and small claim coverage is only available. In this paper, we provide a framework, for insurance companies to duly accept large e-risk. Splitting a large risk across layers reduces the overall variance of the loss. Also in case of a contingency the loss indemnification is shared. The inputs to the proposed model are the risk transfer proportion, overloading for premium, expected return on capital and undistributed risk at each layer. The model outputs the optimal number of layers in which the risk needs to be spilt by the insurance company and the interlayer relationships