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Risk-based Valuation of Investments in Information Security - A Combination Approach



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Journal of Information System Security
Volume 8, Number 1 (2012)
Pages 4355
ISSN 1551-0123
Punnet Prakash — Virginia Commonwealth University, USA
Information Institute Publishing, Washington DC, USA




Information systems security is among the top concerns of both the public and private sectors. However, the valuation of investments in information security has proven difficult. This paper argues that the price that the market charges a firm to bear the risk associated with its information systems forms a benchmark for investment in information security. At this price, the firm is indifferent between investing in security and transferring information systems security’s risk to an outside bearer, most often insurers. Thus, the actuarial techniques that insurers employ to set premiums can be used to value investment in systems security. Actuarial methods to compute premiums are based on expected loss plus a risk premium that aims to account for unexpected loss. This paper uses a combination of the value-at-risk concept and the actuarial frequency-severity analysis to estimate risk premiums and expected loss, respectively. The decision analytic techniques for valuing investments in information security previously suggested in the literature are based on expected loss alone and thus are special instances of this broader approach.




Risk, Management, Information Systems, Security, Valuation, Actuarial Method, Value-at-Risk, Frequency, Severity, Annualized Loss Expectancy




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