Cyber risk modeling within the SIR epidemic framework: a comparative analysis of frequency and severity methods

Abstract This paper addresses the gap between theoretical modeling of cyber risk propagation and empirical analysis of loss characteristics by introducing a novel approach that integrates both approaches. We model the development of cyber loss counts over time using a discrete-time susceptible-infected-recovered process, linking these counts to covariates, and modeling loss severity with regression models. By incorporating temporal and covariate-dependent transition rates, we eliminate the scaling effect of population size on infection counts, revealing the true underlying dynamics. Simulations show that this susceptible-infected-recovered framework significantly improves aggregate loss prediction accuracy, providing a more effective and practical tool for actuarial assessments and risk management in the cyber risk context.