September 11, 2023
Cyber risk quantification (CRQ) is the process of attributing numerical values to a cyber event's impact on an organization. When defined in financial terms, these values enable enterprises to assess and manage their cyber risks at the operational level.
With financial risk quantification, organizations can understand how cyber risks, ranging from ransomware to internal misconduct, will affect their potential revenue, profitability, and other financial aspects that contribute to a business's long-term success rates.
However, despite the numerous beneficial insights CRQ offers, it is drastically underused by enterprises worldwide. Without this valuable tool, organizations remain ignorant of the inevitable cyber risks they face and lack the data needed to understand the magnitude of any attack.
By incorporating a robust cyber risk quantification assessment into their overarching cybersecurity programs, enterprises can gain a sharper understanding of the cyber risks they face and how best to mitigate them.
In this comprehensive guide to cyber risk quantification, we’ll explore:
If you have any questions while you’re reading, don’t hesitate to reach out to our cyber risk quantification experts.
When defining cyber risk quantification and its components, it’s vital to acknowledge that “CRQ” doesn’t simply mean assigning a general value to an enterprise’s or insurance carrier’s insured portfolio. Instead, CRQ involves analyzing all the data that enables organizations to understand how cyber risk affects them concretely.
However, before a business delves too far into the cyber risk quantification process, it must first be able to characterize a cyber vulnerability and discern what happens if and when they are exploited. Otherwise, assigning a dollar amount would be impractical and subjective.
In cybersecurity, a cyber event is considered any measurable activity or occurrence that can compromise an organization's data or digital assets, leading to an obstacle in operational workflows.
These events have several categorizations, allowing for more focused risk management strategies. Some of the most well-known cyber events are malware infections, unauthorized access, data breaches, phishing attacks, vulnerability exploitations, and security policy violations.
Cyber events are typically evaluated within the CIA framework of confidentiality, integrity, and availability. The confidentiality assessment reviews whether unauthorized parties have gained access to sensitive information, and if so, how much and what kind. Integrity examines whether the data has been tampered with, and availability determines if the cyber event impacts the organization's ability to access its systems and data.
Keep in mind that ransom and malicious intent are not inherent components of a cyber event.
Generating an extensive, in-depth cyber risk quantification requires a more robust understanding of the potential ramifications an enterprise faces when hit with a cyber event. To facilitate such an understanding, organizations should evaluate the data according to the golden triangle of cyber risk quantification: resilience, frequency, and severity.
An organization's resilience to a cyber event involves its already-implemented measures to withstand and recover from said occurrences. Resilience can encompass the enterprises' strategies, processes, and technologies it employs to help them maintain and recover operations in the face of an attack or disruption.
Consequently, businesses need to map their digital footprints both internally and externally. For example, cyber teams should explicitly identify the security controls they have in place and test their relative efficacy to discover where vulnerabilities potentially materialize. Teams should also map any 3rd-party providers and stay aware of possible outages.
Enterprises must keep a consistently-updated catalog of their internal past events as well as global cyber attacks to create a frequency-of-events overview. The more data gathered about past events, the more accurate their risk quantification will be when predicting the likelihood of future ones.
The importance of a well-maintained event ledger cannot be overstated. What may seem like an infrequent event one day can quickly transform into a more frequent event the next. Organizations must leverage their available data to keep up with the evolving cyber risk landscape.
It is also crucial for enterprises to understand the potential severity of cyber vulnerabilities and attacks. In short, leaders must evaluate the extent to which the event will impact their operations. This severity can be quantified financially based on:
A cyber event is not necessarily caused by external factors. Indeed, many events occur due to internal or first-party negligence. To generate a more granular risk assessment, your team must distinguish between the two and understand that a cyber event can encompass one or both.
A cyber event may affect on-premise technology, such as when a ransomware attack prevents a company from accessing files stored on a specific computer. Events are not inherently caused by malicious actors and can instead be caused, for example, by a lax employee falling victim to a phishing scam or leaving their computer unattended.
Many companies use third-party providers to facilitate cyber activities, such as email management services or cloud data storage. Like any other company, these providers are similarly vulnerable to cyber events that can significantly impact business operations. Should your third-party cyber vendors suffer an attack or an outage, your company, too, would experience blowback. Third-party service providers are, therefore, a highly determinant factor when considering your cyber risk.
With each event comes the potential for a different set of financial losses. Therefore, differentiating between these types of events is critical for an accurate assessment of the impact of a cyber event, which can be done via a multi-model approach.
These various loss types can be categorized accordingly.
Systematic attacks are categorized as wide-reach and likely to affect a significant portion of companies in a geographic area or industry. These types of events also spread quickly via automation. Systematic events do not target a specific company but rather aim to affect as many businesses as possible.
As the name suggests, targeted events are defined when an adversary invests resources in attacking a specific industry, such as when 15-year-old Jonathan James penetrated NASA in 1999. In targeted attacks, malicious actors typically harness more sophisticated interruption methods, making them more challenging to defend against.
Once companies start to understand and classify the types of cyber events that may occur and evaluate those events in terms of loss, the cyber risk quantification process can begin!
Enterprises must start the cyber risk quantification process by sourcing and analyzing data from each side of the golden triangle. Once completed, a dollar value representing the scale of loss will start to emerge.
Organizations will also need to map the cost components of various events to understand the financial impact. Different cost components include but are not limited to notification costs, monitoring services, ransom amounts, and recovery efforts.
For example, a business interruption may incur costs in the area of public relations to minimize potential reputational damage. There will also be losses in revenue due to the operational downtime. Evaluating these various cost drivers is necessary for a complete understanding of a company's financial exposure.
Assigning a specific, quantitative exposure number on cyber risk requires modeling the impact of several cyber events. While a company may know the types of events they face, the severity of past events, and the vulnerabilities of endpoints, they still require a cohesive model that factors in the present-day nature of the frequency and severity of global cyber attacks.
The importance of a risk model cannot be overstated. For the most accurate results, enterprises should choose one that has the capacity to:
Ultimately, enterprises should employ a CRQ model that offers the potential magnitude of cyber events, along with the likelihood that they will occur within the following year. Kovrr's CRQ solution, for instance, produces a probabilistic model using the exceedance of probability curves to summarize the outcome of the Monte Carlo simulation.
The two types of exceedance curves leveraged in our model are:
The OEP curve highlights the cyber event with the most significant amount of damage in a given year. It enables the calculation of the probability that a single cyber event would have a maximum financial loss above a given amount. In other words, it reveals the highest impact event and respective financial loss.
The AEP curve summarizes the cyber events over the year, allowing for the assessment of the probability that aggregated financial loss exceeds a given amount. This calculation is particularly beneficial for organizations looking to negotiate more cost-effective cybersecurity insurance policies.
Understanding the components encompassing a cyber risk quantification model, combined with knowing how the data is calculated to translate risk into financial terms, is a colossal step toward managing cyber risk more effectively. But it's not the endpoint. Enterprises still need to consider several other factors for accurate risk assessment.
At a minimum, cyber risk quantification should be conducted quarterly for the most strategic use. If the quantification model is only calculated once a year, there's a significant chance that new technologies, service providers, and external cyber events will be unaccounted for, generating a less-than-accurate assessment.
It's critical for an organization to have a systemized, consistent process that enables them to run cyber risk quantification assessments on demand. This process includes maintaining a reliable way to collect and analyze data for the golden triangle.
There are several different methodologies an organization can employ when conducting a quantitative risk analysis, but not all are created equal. When exploring the CRQ model that’s best for your business, it’s essential to consider long- and short-term goals, highlighting what your team hopes to achieve with its new, quantified insights.
Your team can opt to hire a third-party professional service that will produce an in-depth risk report based on their findings. However, these services typically utilize unstandardized data gathering and analysis procedures, rendering their findings highly subjective. This subjective assessment is helpful for internal comparisons but leaves no option for external benchmarking.
Additionally, professional services can take a very long time to complete, which might render their findings obsolete by the time they’re finished. The cyber risk landscape evolves rapidly regardless of your relative industry, making a swift evaluation process all the more critical.
The latest CRQ solutions account for an enterprise's necessity for timely, objective, and contextualized risk evaluations. These state-of-the-art tools, like Kovrr's, harness API integrations to ensure an organization's cyber posture truly reflects its current state of security controls instead of relying on subjective judgments.
These types of solutions similarly eliminate the need for external, third-party service providers, harnessing standardized data instead. Moreover, CRQ platforms like Kovrr's enable organizations to generate new assessments on-demand, offering both timely risk overviews as well as long-term progress reports.
Once an organization understands the basic principles of quantifying cyber risk and implements a model consistently into its security practices, a myriad of benefits will emerge. These benefits empower enterprises to make actionable plans that reduce risk and safeguard ROI.
Quantifying your cyber risk with a platform like Kovrr's allows you to translate your findings into financial terms. With these insights, the rest of the boardroom will better understand the business challenges your security team faces.
Ultimately, speaking the same language regarding security risk is paramount to creating board-approved action plans. Only once boardroom members understand risk in the recognizable language of finance will they grasp its urgency.
A CRQ platform can segment your business, allowing you to review your organization's relative risk level at varying degrees. Instead of merely seeing the overall financial risk potential, an organization can review the relative risk factors based on department, geographic location, technologies employed, or any other business aspect. This granularity grants security teams a much more specific understanding of where their business risk lies.
Security teams can prioritize risk mitigation resources accordingly once the business risk has been broken down according to asset level or other various degrees. Because there are potentially hundreds of areas of an organization that pose a cyber risk, it can be challenging, if not impossible, to know where to begin. However, with a financial risk quantification, CISOs can precisely see which areas pose the most significant threat of financial loss.
With a financial understanding of its potential loss due to cyber events, an organization can formulate a much more realistic risk appetite than without. This more practical approach maximizes the chances of an enterprise meeting its yearly goals and achieving an overall positive ROI.
Segmenting the scenarios in which your enterprise might suffer loss and evaluating them in financial terms helps you negotiate more economical insurance policies that won't leave you paying unreasonable deductibles.
For example, a CRQ might reveal the average annual loss of a ransomware event is projected at $1 million. This valuable information allows the organization to negotiate a policy in which the deductible for "ransomware" is lower and, thus, cost-effective.
There is growing pressure on CISOs throughout all industries to justify their budget requests financially. A qualitative cyber risk assessment can help do that. For instance, a CRQ platform like Kovrr's allows you to view how much money your company would save if (in the case of a cyber event) your team updated its security controls. Therefore, a CISO could easily argue that an upgrade was worth it if it did not exceed the difference in these potential savings.
Unfortunately, nowadays, cyber events are virtually inevitable. So when they do happen, you want to ensure you're as prepared as possible, minimizing overall financial impact. A CRQ allows your team to review its organization's most vulnerable assets along with those that pose the most significant financial loss in an event.
This information, combined with the probability of an event occurring, equips an organization to make timely, informed action plans that ultimately decrease these costs.
Equipped with so many insights into an organization's cyber risk, coupled with the ability to translate this risk into financial terms that non-tech personnel understand, security teams hold the key to forming stronger relationships with stakeholders.
Communication and transparency breed trust, and investors will be grateful that they better grasp the risks they're taking with their money. A financial CRQ is the base on which this relationship can be built.
Nowadays, it’s critical that business leaders stay informed of the various risk elements involved with their cyber operations and the potential financial losses that can occur due to an event. Indeed, the organizations that remain unaware of how much a cyber event could cost them are typically the ones that suffer the most financially when the inevitable occurs.
By harnessing a CRQ solution that can quickly collect and evaluate the relevant cyber data, enterprises and insurance carriers gain a sharper understanding of how to protect themselves against cyber events, ensuring long-term success within a highly dynamic landscape.
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