Cybersecurity insurance is insurance that is designed to protect a business against financial losses that may result from cyber incidents such as data breaches and theft, hacking, ransomware and denial of service attacks.
According to the U.S. government
, cyber insurance increases cyber security by encouraging the adoption of best practices. Insurers will require a level of security as a precondition of coverage, and companies adopting better security practices often receive lower insurance rates. This helps companies to internalize both the benefits of good security and the costs of poor security, which in turn leads to greater investment and improvements in cyber security.
Security requirements used by cyber insurers are also helpful. With widespread take up of insurance, these requirements become de facto standards, while still being quick to update as necessary. Since insurers will be required to pay out cyber losses, they have a strong interest in greater security, and their requirements are continually increasing.
As well as directly improving security, cyber insurance is enormously beneficial in the event of a large-scale security incident. Insurance provides a smooth funding mechanism for recovery from major losses, helping businesses to return to normal and reducing the need for government assistance.
Finally, insurance allows cyber security risks to be distributed fairly, with higher premiums for companies whose expected loss from such risks is greater. This avoids potentially dangerous concentration of risk while also preventing free riding.