Optimal Reinsurance for Cyber Risk Transfer

In this paper, we develop a dynamic model of optimal reinsurance and asset allocation for an insurer who aims to minimize the ruin probability of facing cyber disasters. We find a vital discontinuity and significant change in the insurer’s optimal choices with cyber risk compared to the case without cyber risk. Whether or not the frequency of cyber disasters is estimated correctly does not matter for the insurer’s optimal policies. Instead, considering the presence of cyber risk resulting in the insurer defaulting in an extreme cyber disaster scenario is of utmost importance to the insurer’s cyber risk management. Analytical comparative statics and numerical experiments are provided to discuss various properties of the insurer’s optimal strategies.