E-Risk Insurance Product Design: A Copula Based Bayesian Belief Network Model

E-Risk Insurance Product Design: A Copula Based Bayesian Belief Network Model

Arunabha Mukhopadhyay (Indian Institute of Management Lucknow, India), Samir Chatterjee (Claremont Graduate University, India), Debashis Saha (Indian Institute of Management Calcutta, India), Ambuj Mahanti (Indian Institute of Management Calcutta, India) and Samir K. Sadhukhan (Indian Institute of Management Calcutta, India)
DOI: 10.4018/978-1-60566-132-2.ch004
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Abstract

An online business organization spends millions of dollars on firewalls, anti-virus, intrusion detection systems, digital signature, and encryption, to ensure minimal security breach. Nonetheless, a new virus or a clever hacker can easily compromise these deterrents, resulting in losses to the tune of millions of dollars annually. To minimize the financial loss, we propose that online businesses should invest in e-risk insurance products as a complementary alternative, above the network security appliances. In this work, we develop a Copula aided Bayesian Belief Network (CBBN) model, to assist insurance companies to design e-insurance products. The CBBN model does an e-vulnerability assessment (e-VA) and e-risk quantification (e-RQ). We first draw a casual diagram (BBN) stating the probable reason for security failure in an organization. We assume the marginal distributions for each of the nodes of the diagram. Using the CBBN model we compute the joint probability of the constituent nodes of the BBN. Next the conditional probability of each of the occurrences of the malicious event is arrived at. We then assume a loss distribution, and using the principles of collective risk modeling, we arrive at the expected severity of the attack. The e-risk insurance companies compute the premium, by charging an extra (i.e., overloading and contingency loading), over the expected severity of attack.
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Introduction

E-risk is defined as the possibility of a malicious electronic event, whose occurrence causes loss to e-business. These consists of (i) comprise of network security components (such as firewall, proxy servers, anti virus), (ii) the compromise of the organization web server, and incorrect or indecent material posted on the web site (commonly called graffiti), (iii) service providers (i.e., Application Service Provider (ASP) or Internet Service Provider (ISP)) failing, (iv) identity theft (i.e., confidential customer information is hacked from an organizational database; example, pin numbers of credit cards from a bank), (v) attacks by disgruntled employees, (vi) cyber-extortion, (vii) Denial of Service (DoS) by making malicious calls to the router, (viii) attack by wireless devices (such as PDAs, mobile phones etc). CSI/FBI 2004 report (Gordon, Loeb, Lucyshyn & Richardson, 2004) states that the most vital e-risk in USA is virus attack (loss of $55 Million). It is followed by DoS attack (loss of $26 Million), and theft of proprietary information (loss of $11 Million).

Organizations spend millions annually for deployment of sophisticated technical defenses (such as encryption, access control and firewalls) (Gordon, & Loeb, 2002) and intrusion detection systems to guard against malicious attacks. CSI/FBI report (Gordon et al., 2004) states most organizations in USA have deterrents such as (i) antivirus software (99%), (ii) firewalls (98%), (iii) proxy servers (71%), and (iv) intrusion detection systems (68%). Yet security breaches are very common.

Anderson (2001) opines that the chance of a clever hacker breaking into the system is much higher than the chance that the CTO would detect it. This can be sustained with the following example. Assume there are n vulnerabilities in an organizational network. In a given period of time, the hacker needs to find only one as opposed to the CTO who has to be aware of all the n vulnerabilities to protect the system from malicious attacks. Thus, it is a win–win situation always for the intruder. Schneier (2001) notes, that a new virus can easily comprise the perimeter security devices, as there is no signature available in the anti-virus engine to track it down. The CSI/FBI report (Gordon et al., 2004) corroborates this fact, as loss due to virus attack in USA alone was $55 Million in 2004.

To supplement the existing security measures and to reduce the monetary loss, an effective alternative mechanism is insuring (Gordon, Loeb, & Sohail, 2003; Grzebiel, 2002; Mukhopadhay, Chatterjee, Saha, Mohanti 2005a; Mukhopadhyay, Chatterjee, Saha, Mohanti, Chakrabarti and Podder, 2005b, 2005c; Mukhopadhyay, Chatterjee, Saha, Mohanti, and Sadhukhan,2006 ; Mukhopadhyay 2007, Mukhopadhay, Chatterjee, Saha, Mohanti, Roy and Sadhukhan,2007a; Mukhopadhay, Chakrabari Saha, Mohanti 2007b) against these risks. This would help reduce the financial burden on the organizations, as the insurance company would indemnify the loss. In effect, the organizations risk is being passed on to another party at the cost of a premium. This reduces the companies concern about “self insuring” (i.e., keeping aside huge amount for contingency purposes). This, in turn, is a good corporate strategy, as huge amounts are not locked away for contingency provisions and security breaches.

Key Terms in this Chapter

Collective Risk Model: It assumes that the loss frequency and loss amount of an e-risk are both stochastic variables. The expected loss or claim severity is the product of claim size and claim amount.

Actuarial Approach: Identifies the loss frequency and the loss amounts distribution using past data.

Process Approach: It models chain of activities that comprise an operation or transaction and finding out the exact risk for each process.

BBN Graph: It is made up of nodes and arcs. Nodes are random variables. The arcs indicate causal relationship between the variables. Each node has a probability table associated with it. The root node(s) have only marginal probability associated with it, while the child nodes have conditional probabilities tables associated with it.

E-Risk: Defined as the possibility of a malicious electronic event, whose occurrence causes loss to e-business. These consists of (i) comprise of perimeter network security components, (ii) graffiti, (iii) Application Service Provider or Internet Service Provider failing, (iv) identity theft, (v) attacks by disgruntled employees, (vi) cyber-extortion, (vii) Denial of Service, (viii) attack by wireless devices.

Copula: Joint distribution of random variables can be expressed as a function of marginal distributions. It also takes into account correlation amongst the marginal distributions.

Operational Risk: It arises due to failure of process, people, systems or external events. Basel II mandates that operational risk is quantified and a capital allocation done for it.

Bayesian Belief Network (BBN): A graphical relationship between causal variables. BBNs enable reasoning under uncertainty and combine the advantages of an intuitive visual representation with a sound mathematical basis of Bayesian probability.

Premium: It is the product of the expected loss times the loading factor (i.e.,, profit and overhead charges) plus contingency loading times the variance of the loss.

Factor Approach: Aims to determine a mathematical equation that relates the level of operational risk for institution or business or process to a set of factors.

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Table of Contents
Foreword
John Walp
Preface
Manish Gupta, Raj Sharman
Chapter 1
C. Warren Axelrod
This chapter examines the impact of catastrophes on information security and suggests who might have responsibility for maintaining an appropriate... Sample PDF
Responsibilities and Liabilities with Respect to Catastrophes
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Chapter 2
David Porter
This chapter discusses the latest developments in the shifting threat landscape and their impact on the world of information security. It describes... Sample PDF
The Complex New World of Information Security
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Chapter 3
Ahmed Awad E. Ahmed
In recent years, many studies have highlighted the unprecedented growth in security threats from multiple and varied sources faced by corporate, as... Sample PDF
Employee Surveillance Based on Free Text Detection of Keystroke Dynamics
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Chapter 4
Arunabha Mukhopadhyay, Samir Chatterjee, Debashis Saha, Ambuj Mahanti, Samir K. Sadhukhan
An online business organization spends millions of dollars on firewalls, anti-virus, intrusion detection systems, digital signature, and encryption... Sample PDF
E-Risk Insurance Product Design: A Copula Based Bayesian Belief Network Model
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Chapter 5
Guoling Lao
E-commerce mode aggravates information asymmetry so that honesty-credit problems become more serious. This chapter discusses the honesty-credit... Sample PDF
E-Commerce Security and Honesty-Credit
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Chapter 6
Zhixiong Zhang, Xinwen Zhang, Ravi Sandhu
This chapter addresses the problem that traditional role-base access control (RBAC) models do not scale up well for modeling security policies... Sample PDF
Towards a Scalable Role and Organization Based Access Control Model with Decentralized Security Administration
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Chapter 7
Chandan Mazumdar
There has been an unprecedented thrust in employing Computers and Communication technologies in all walks of life. The systems enabled by... Sample PDF
Enterprise Information System Security: A Life-Cycle Approach
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Chapter 8
Peter O. Orondo
Most companies would agree that securing their information assets is worth some investment. It is thus plausible to assume that low levels of IT... Sample PDF
An Alternative Model of Information Security Investment
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Chapter 9
George O.M. Yee
The growth of the Internet is increasing the deployment of e-services in such areas as e-commerce, e-learning, and e-health. In parallel, the... Sample PDF
Avoiding Pitfalls in Policy-Based Privacy Management
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Chapter 10
Supriya Singh
Enabling customers to influence the way they are represented in the bank’s databases, is one of the major personalization, responsiveness, and... Sample PDF
Privacy and Banking in Australia
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Chapter 11
Madhusudhanan Chandrasekaran, Shambhu Upadhyaya
Phishing scams pose a serious threat to end-users and commercial institutions alike. E-mail continues to be the favorite vehicle to perpetrate such... Sample PDF
A Multistage Framework to Defend Against Phishing Attacks
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Chapter 12
Ghita Kouadri Mostefaoui, Patrick Brézillon
In recent years, the security research community has been very active in proposing different techniques and algorithms to face the proliferating... Sample PDF
A New Approach to Reducing Social Engineering Impact
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Chapter 13
Yang Wang
Privacy-enhancing technologies (PETs), which constitute a wide array of technical means for protecting users’ privacy, have gained considerable... Sample PDF
Privacy-Enhancing Technologies
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Chapter 14
Douglas P. Twitchell
This chapter introduces and defines social engineering, a recognized threat to the security of information systems. It also introduces a taxonomy... Sample PDF
Social Engineering and its Countermeasures
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Chapter 15
Tom S. Chan
Social networking has become one of the most popular applications on the Internet since the burst of the dot-com bubble. Apart from being a haven... Sample PDF
Social Networking Site: Opportunities and Security Challenges
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Chapter 16
James W. Ragucci, Stefan A. Robila
Fraudulent e-mails, known as phishing attacks, have brought chaos across the digital world causing billions of dollars of damage. These attacks are... Sample PDF
Designing Antiphishing Education
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Chapter 17
Serkan Ada
This chapter discusses the recent theories used in information security research studies. The chapter initially introduces the importance of the... Sample PDF
Theories Used in Information Security Research: Survey and Agenda
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Chapter 18
Samuel Liles
Information assurance education is an interdisciplinary endeavor that only when taken as a holistic and inclusive educational activity can be... Sample PDF
Information Assurance and Security Curriculum Meeting the SIGITE Guidelines
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Chapter 19
Gary Hinson
This chapter highlights the broad range of factors that are relevant to the design of information security awareness programs, primarily by... Sample PDF
Information Security Awareness
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Chapter 20
Nick Pullman, Kevin Streff
Security training and awareness is often overlooked or not given sufficient focus in many organizations despite being a critical component of a... Sample PDF
Creating a Security Education, Training, and Awareness Program
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Chapter 21
E. Kritzinger, S.H von Solms
This chapter introduces information security within the educational environments that utilize electronic resources. The education environment... Sample PDF
Information Security Within an E-Learning Environment
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Chapter 22
Donald Murphy, Manish Gupta, H.R. Rao
We present five emerging areas in information security that are poised to bring the radical benefits to the information security practice and... Sample PDF
Research Notes on Emerging Areas of Conflict in Security
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Chapter 23
C. Orhan Orgun
This chapter develops a linguistically robust encryption system, LunabeL, which converts a message into syntactically and semantically innocuous... Sample PDF
The Human Attack in Linguistic Steganography
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Chapter 24
Sérgio Tenreiro de Magalhães, Kenneth Revett, Henrique M.D. Santos, Leonel Duarte dos Santos, André Oliveira, César Ariza
The traditional approach to security has been the use of passwords. They provide the system with a barrier to access what was quite safe in the... Sample PDF
Using Technology to Overcome the Password's Contradiction
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Chapter 25
Antonio Cerone
Reducing the likelihood of human error in the use of interactive systems is increasingly important. Human errors could not only hinder the correct... Sample PDF
Formal Analysis of Security in Interactive Systems
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Chapter 26
Tejaswini Herath
It is estimated that over 1 billion people now have access to the Internet. This unprecedented access and use of Internet by individuals around the... Sample PDF
Internet Crime: How Vulnerable Are You? Do Gender, Social Influence and Education play a Role in Vulnerability?
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Chapter 27
Jarrod Trevathan
Shill bidding is where spurious bids are introduced into an auction to drive up the final price for the seller, thereby defrauding legitimate... Sample PDF
Detecting Shill Bidding in Online English Auctions
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Chapter 28
Carsten Röcker, Carsten Magerkurth, Steve Hinske
In this chapter we present a novel concept for personalized privacy support on large public displays. In the first step, two formative evaluations... Sample PDF
Information Security at Large Public Displays
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Chapter 29
Yuko Murayama, Carl Hauser, Natsuko Hikage, Basabi Chakraborty
The sense of security, identified with the Japanese term, Anshin, is identified as an important contributor to emotional trust. This viewpoint... Sample PDF
The Sense of Security and Trust
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About the Contributors