A Novel Approach to Cyber Risk Quantification for Enterprise Decision

Abstract

It is in the realm of cyber risk governance to enterprises that we have gotten sucked into the rut of broadly qualitative maturity ratings and scores that do not have much financial relevance or decision-making usefulness. With the growing complexity of digital systems and infrastructures, due to the emergence of cloud-native systems, distributed systems, and sophisticated third-party ecosystems, a more financially focused and compatible cyber risk image is required against the existing enterprise-wide risk management systems. In this paper, I have described a quantitative cyber risk model in the form of a structure that incorporates the financial quantification of the assets, probabilistic frequency analysis of the threats, vulnerability exposure index, loss propagation model with dependency modification, and stochastic simulation of annualized loss distributions. We formalize cyber exposure as a financial function under uncertainty which in turn supports stress testing, capital allocation optimization and insurance calibration. A financial industry example of out-of-province casual study indicates that exposure differentiation, tail-risk viewability and prioritization of mitigation are better with this new framework than with standard heat-map techniques. The framework provides a falsifiable and economically understandable basis of enterprise cyber governance.