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FRM Part II · FRM Exam Part II · Risk Mitigation

A bank has a cyber insurance policy with a USD 50 million limit. Its scenario analysis shows a severe but plausible cyber event could cause USD 120 million of losses, of which USD 20 million would be excluded as acts of war under the policy. The deductible is USD 10 million. What is the maximum insurance recovery and the resulting net loss?

Recovery is capped at USD 50 million and the net loss is USD 70 million. After excluding USD 20 million and applying the USD 10 million deductible, USD 90 million would be payable, but the policy limit restricts payment to USD 50 million, leaving 120 minus 50.

  1. ARecovery USD 50 million; net loss USD 70 millionCorrect
  2. BRecovery USD 90 million; net loss USD 30 million
  3. CRecovery USD 100 million; net loss USD 20 million
  4. DRecovery USD 50 million; net loss USD 120 million

Explanation

Covered loss = 120 - 20 = 100. Less deductible 10 = 90, but the limit caps recovery at 50. Net loss = 120 - 50 = 70. Option 90 ignores the limit.

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