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Efficient risk transfer is an important condition for ensuring the sustainability of a market according to the established economics literature. In an inefficient market, significant financial imbalances may develop and potentially jeopardize the solvency of some market participants. The constantly evolving nature of cyber-threats and lack of public data sharing mean that the economic conditions required for quoted cyber-insurance premiums to be considered efficient are highly unlikely to be met. This paper develops Monte Carlo simulations of an artificial cyber-insurance market and compares the efficient and inefficient outcomes based on the informational setup between the market participants. The existence of diverse loss distributions is justified by the dynamic nature of cyber-threats and the absence of any reliable and centralized incident reporting. It is shown that the limited involvement of reinsurers when loss expectations are not shared leads to increased premiums and lower overall capacity. This suggests that the sustainability of the cyber-insurance market requires both better data sharing and external sources of risk tolerant capital.

We show the equivalence between the zero-beta version of a multi-factor arbitrage pricing model and a linear pricing model utilizing undiversified inefficient benchmarks in a given factor structure. The resulting linear model is a two-beta model, with one beta related to the inefficient benchmark and another adjusting for its inefficiency. This linear model shows that there are only two distinctive and computable sources of risk, affecting security expected returns, despite the existence of several risk factors. In a short empirical example we demonstrate that the model can be employed to provide guidance and allow researchers to test for the validity of their selection of the underlying risk factors driving variations in security returns.

Information security is concerned with protecting the confidentiality, integrity, and availability of information systems. System managers deploy their resources with the aim of maintaining target levels of these attributes in the presence of reactive threats. Information stewardship is the challenge of maintaining the sustainability and resilience of the security attributes of (complex, interconnected, multi-agent) information ecosystems. In this paper, we present, in the tradition public economics, a model of stewardship which addresses directly the question of resilience. We model attacker-target-steward behaviour in a fully endogenous Nash equilibrium setting. We analyse the occurrence of externalities across targets and assess the steward’s ability to internalise these externalities under varying informational assumptions. We apply and simulate this model in the case of a critical national infrastructure example.