How insurers can use systemic risk knowledge internally

Insurers are the market experts in systemic risk, evaluating it across industries and geographies to manage portfolio exposure. For decades, if not centuries, they've analyzed risk clusters, stress-tested potential loss scenarios, and quantified financial exposure, perfecting underwriting strategies and optimizing policy terms and conditions. 

Yet, despite this aptitude, many fail to apply the same level of scrutiny to their operations, especially when it comes to cyber risk. As cyber threats become more costly and grow more intricately connected, these insurers must start applying the same risk assessment rigor to their internal operations and digital infrastructure.

Systemic risk doesn't end with the portfolio

Insurance companies, like their portfolios, are not immune to cyber threats. They, too, rely on cloud-based third-party services to successfully carry out critical operational functions, ranging anywhere from email to payment processes. While these digital solutions have grossly increased workplace efficiency, their adoption does not come without the potential for wide-scale cascading consequences.

Cyber events such as the MOVEit data breach, SolarWinds attack, and, most recently, CrowdStrike business outage demonstrate that the compromise of a single vendor can trigger mass disruptions. For insurers, these incidents should serve as a resounding warning that their operational dependencies could just as easily become points of failure, leading to significant financial and reputational losses. 

What's more, regulatory bodies worldwide are taking notice of these cataclysmic events and demanding accountability. Standards such as the U.S. SEC's cybersecurity disclosure rules and E.U. 's DORA explicitly places the responsibility of cyber risk management on financial institutions, not limited to but including insurers. Those under the purview of these laws must be able to demonstrate they have performed their due diligence.

This heightened scrutiny further underscores the reality that insurers can no longer afford to focus solely on the systemic risk within their portfolios. To keep pace, they must also carefully analyze their internal third-party service provider cyber exposure. The same principles that are applied when modeling systemic risk for customers can be turned inward to build their own cyber resilience. 

CRQ: The key to measuring and managing systemic cyber exposure

Cyber risk quantification (CRQ) models equip insurers to anticipate and plan for incidents catalyzed by third-party outages and vulnerability exploitations. Specifically, with multi-model on-demand CRQ, stakeholders can financially quantify the exact cyber exposure levels they face due to the third-party services they employ and identify how vendor incidents may propagate throughout their networks.

This data-fueled solution has the power to move beyond the assessment of cyber risks in isolation and instead aggregates exposure across shared technologies, industries, and geographies, accounting for systemic events that could impact multiple entities simultaneously. By incorporating both catastrophic and targeted cyber risks into its models, CRQ provides insurers with a comprehensive evaluation, helping relevant stakeholders make more informed decisions. .

An on-demand CRQ platform can analyze third-party service provider risk, offering, among other insights, the annual likelihood of an event driven by a specific product and the average annual loss (AAL) should that scenario take place. With this data, an insurance provider can determine if a specific solution is worth the investment. If the AAL, for example, exceeds the monetary advantages of the product, it may not be a viable option from a risk-return perspective.

Translating cyber risk into financial terms

Another key advantage of employing financial CRQ models is that the ensuing outcomes and metrics are business-oriented and, therefore, more easily understood by decision-makers within the organization, even those without any cybersecurity experience. C-suite and board members can evaluate cyber risk in monetary terms, allowing them to formulate data-driven decisions regarding resource allocation and regulatory compliance.

This translation of cyber exposure also helps to foster cross-functional collaboration between different departments, ensuring that risk mitigation efforts are strategically aligned across the company. At the same time, the cohesiveness facilitated by CRQ helps to position cybersecurity as a business driver rather than a cost center. In an industry where financial prudence and risk foresight are paramount, such a shift enhances preparedness and supports growth.

Quantifying systemic cyber risk: A strategic imperative for insurers

Insurers have long been experts in analyzing and underwriting systemic risk, but their focus has largely been on the exposure of their portfolios rather than internal cyber vulnerabilities. Unfortunately, this tunnel vision is no longer sufficient. The increasing reliance on third-party services, combined with a rise in frequency and cost of systemic cyber events, demands that insurers must now turn the risk assessment lens inward. 

Leveraging financial cyber risk quantification models equips insurance institutions to measure their cyber exposure, both systemic and targeted, with the same precision and accuracy they apply when evaluating their portfolios. It helps them make smarter, cost-effective cyber risk management decisions. As the cyber threat environment continues to become all the more dire, insurers that proactively quantify and mitigate their internal exposure will gain a competitive edge and flourish in the upcoming years.