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FRM Part II · FRM Exam Part II · Digital Resilience and Financial Stability: The Quest for Policy Tools in the Financial Sector

An analyst argues that cyber insurance can fully substitute for investment in operational resilience at financial institutions. Which is the strongest reason this view is flawed from a financial stability perspective?

The view is flawed because insurance only transfers financial loss; it does not restore critical services or prevent disruption, and widespread correlated cyber events can exceed insurers' capacity. Resilience investment remains necessary, with insurance as a complement rather than a substitute.

  1. AInsurance premiums are always tax deductible, distorting incentives
  2. BInsurance cannot be purchased by regulated financial institutions
  3. CInsurance transfers financial loss but does not restore critical services, and correlated systemic events may exceed insurer capacityCorrect
  4. DInsurance eliminates the probability of a cyber event

Explanation

Insurance compensates financial loss only; it does not keep payments or other critical services running. Systemic cyber events are highly correlated and aggregation can exceed insurers' capacity, and coverage often has exclusions. The other options are false or irrelevant.

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