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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 insurer considers offering cyber coverage to many banks that all depend on the same software vendor. Which is the main concern for the insurer's portfolio and for financial stability?

The main concern is accumulation risk: a single shared vendor failure could cause correlated losses across many insured banks, undermining diversification and potentially exceeding insurer capacity. This limits insurability and means insurance cannot substitute for operational resilience in the financial sector.

  1. AAdverse selection is impossible in cyber insurance
  2. BMoral hazard disappears once a policy is bought
  3. CAccumulation risk, because one vendor failure could trigger correlated losses across many insuredsCorrect
  4. DPremiums become independent of security controls

Explanation

Common dependencies create correlated losses, so diversification fails and aggregate losses can exceed capacity. This accumulation risk limits insurability and means insurance cannot fully substitute for resilience. The other statements are false: moral hazard and adverse selection remain concerns.

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