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externalities

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The Cost of Cyberattacks Is Less than You Might Think

Interesting research from Sasha Romanosky at RAND:

Abstract: In 2013, the US President signed an executive order designed to help secure the nation’s critical infrastructure from cyberattacks. As part of that order, he directed the National Institute for Standards and Technology (NIST) to develop a framework that would become an authoritative source for information security best practices. Because adoption of the framework is voluntary, it faces the challenge of incentivizing firms to follow along. Will frameworks such as that proposed by NIST really induce firms to adopt better security controls? And if not, why? This research seeks to examine the composition and costs of cyber events, and attempts to address whether or not there exist incentives for firms to improve their security practices and reduce the risk of attack. Specifically, we examine a sample of over 12 000 cyber events that include data breaches, security incidents, privacy violations, and phishing crimes. First, we analyze the characteristics of these breaches (such as causes and types of information compromised). We then examine the breach and litigation rate, by industry, and identify the industries that incur the greatest costs from cyber events. We then compare these costs to bad debts and fraud within other industries. The findings suggest that public concerns regarding the increasing rates of breaches and legal actions may be excessive compared to the relatively modest financial impact to firms that suffer these events. Public concerns regarding the increasing rates of breaches and legal actions, conflict, however, with our findings that show a much smaller financial impact to firms that suffer these events. Specifically, we find that the cost of a typical cyber incident in our sample is less than $200 000 (about the same as the firm’s annual IT security budget), and that this represents only 0.4% of their estimated annual revenues.

The result is that it often makes business sense to underspend on cybersecurity and just pay the costs of breaches:

Romanosky analyzed 12,000 incident reports and found that typically they only account for 0.4 per cent of a company’s annual revenues. That compares to billing fraud, which averages at 5 per cent, or retail shrinkage (ie, shoplifting and insider theft), which accounts for 1.3 per cent of revenues.

As for reputational damage, Romanosky found that it was almost impossible to quantify. He spoke to many executives and none of them could give a reliable metric for how to measure the PR cost of a public failure of IT security systems.

He also noted that the effects of a data incident typically don’t have many ramifications on the stock price of a company in the long term. Under the circumstances, it doesn’t make a lot of sense to invest too much in cyber security.

What’s being left out of these costs are the externalities. Yes, the costs to a company of a cyberattack are low to them, but there are often substantial additional costs borne by other people. The way to look at this is not to conclude that cybersecurity isn’t really a problem, but instead that there is a significant market failure that governments need to address.

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Economic Failures of HTTPS Encryption

Interesting paper: “Security Collapse of the HTTPS Market.” From the conclusion:

Recent breaches at CAs have exposed several systemic vulnerabilities and market failures inherent in the current HTTPS authentication model: the security of the entire ecosystem suffers if any of the hundreds of CAs is compromised (weakest link); browsers are unable to revoke trust in major CAs (“too big to fail”); CAs manage to conceal security incidents (information asymmetry); and ultimately customers and end users bear the liability and damages of security incidents (negative externalities).

Understanding the market and value chain for HTTPS is essential to address these systemic vulnerabilities. The market is highly concentrated, with very large price differences among suppliers and limited price competition. Paradoxically, the current vulnerabilities benefit rather than hurt the dominant CAs, because among others, they are too big to fail.

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