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

An insurer writes cyber policies with a 1,000 policy portfolio, each with a 4 million limit. It estimates an independent annual claim probability of 2% per policy for idiosyncratic events. It also estimates a 1% annual probability of a systemic event (for example, failure of a common cloud provider) that would trigger claims on 30% of policies at full limit. Ignoring idiosyncratic events in the systemic scenario, what is the insurer's loss in the systemic event, and how does it compare to the expected annual idiosyncratic loss?

The systemic event loss is 30% of 1,000 policies times 4 million, or 1,200 million, while the expected idiosyncratic loss is 1,000 times 2% times 4 million, or 80 million. Correlated losses are fifteen times larger, illustrating the aggregation risk that limits insurability.

1. ASystemic loss 1,200 million; expected idiosyncratic loss 80 millionCorrect
2. BSystemic loss 1,200 million; expected idiosyncratic loss 40 million
3. CSystemic loss 120 million; expected idiosyncratic loss 80 million
4. DSystemic loss 300 million; expected idiosyncratic loss 80 million