The Math Behind Cyber Risk and Fraud: How to Quantify Your Exposure

Prakash Prasad
4 min readApr 15, 2023

By Prakash Prasad (Chartered Financial Risk Manager- Ch.FRM)

Courtesy: Prixabay.com

In today’s digital age, cyber risk and fraud are two of the most pressing risks that we face. In this article, we will explore the current landscape of cyber risk and fraud, the potential impact on organizations, and the steps that can be taken to mitigate these risks.

Cyber Risk

Cyber risk refers to the risk of loss or damage to an organization’s reputation, assets, or operations due to a failure of its information technology systems or processes. According to a recent report by Cybersecurity Ventures, cybercrime is expected to cost the world $10.5 trillion annually by 2025, up from $3 trillion in 2015.

The financial services industry is particularly vulnerable to cyber risk, with 69% of organizations reporting a cyber incident in the past 12 months, according to a 2020 report by Deloitte. Cyber incidents can result in significant financial losses, with the average cost of a cyber attack for financial services organizations being $18.3 million, according to a 2020 report by Accenture.

Fraud

Fraud refers to the intentional deception or misrepresentation that an individual or entity makes for personal gain. According to the Association of Certified Fraud Examiners, organizations lose an estimated 5% of their annual revenues to fraud, with a median loss of $125,000 per fraud case.

The financial services industry is particularly vulnerable to fraud, with 43% of financial institutions reporting an increase in fraud losses in 2020, according to a report by Experian. Fraud can take many forms, including insider fraud, identity theft, and payment fraud.

The Impact of Cyber Risk and Fraud

The impact of cyber risk and fraud can be significant, both financially and reputationally. In addition to the direct costs of cyber incidents and fraud losses, organizations may also experience a loss of customer trust, damage to their reputation, and regulatory fines and penalties.

For example, in 2017, Equifax experienced a data breach that exposed the personal information of 147 million individuals. The company incurred $1.4 billion in costs related to the breach, including $690 million in settlement payments to affected individuals.

Similarly, in 2020, Wirecard, a German payment processor, filed for insolvency after it was revealed that $2.1 billion was missing from its accounts. The company’s CEO was arrested on charges of fraud and market manipulation.

Here are a few formulas that can help illustrate the impact of cyber risk and fraud:

Cyber Risk Formula:

Cyber Risk = (Vulnerability x Threat x Consequence) / Countermeasures

In this formula, vulnerability refers to the likelihood of an organization’s systems being compromised, threat refers to the likelihood of an attack occurring, consequence refers to the potential impact of a successful attack, and countermeasures refer to the organization’s ability to prevent, detect, and respond to cyber incidents.

Fraud Loss Formula:

Fraud Loss = (Frequency of Fraud x Average Loss per Fraud) / Revenue

In this formula, frequency of fraud refers to the number of fraud cases that an organization experiences, average loss per fraud refers to the average financial impact of each fraud case, and revenue refers to the organization’s total revenue.

By using these formulas, organizations can better understand their exposure to cyber risk and fraud, and develop strategies to mitigate these risks.

Mitigating Cyber Risk and Fraud

To mitigate cyber risk and fraud, organizations must take a multi-faceted approach that includes technology, people, and processes. The following are some essential actions to consider:

Implementing Strong Cybersecurity Measures: Organizations should implement strong cybersecurity measures, including firewalls, intrusion detection and prevention systems, and endpoint protection.

Conducting Regular Risk Assessments: Organizations should conduct regular risk assessments to identify potential vulnerabilities and risks, and develop strategies to mitigate them.

Training Employees: Employees can be a significant source of cyber risk and fraud. Organizations should provide regular training and awareness programs to ensure that employees understand the risks and how to prevent them.

Implementing Fraud Detection Systems: Organizations should implement fraud detection systems, including transaction monitoring and anomaly detection, to identify potential fraudulent activity.

Conducting Due Diligence: Organizations should conduct due diligence on third-party vendors and service providers to ensure that they have adequate cybersecurity and fraud prevention measures in place.

Conclusion

Cyber risk and fraud are two of the most significant risks that organizations face in today’s digital age. The potential impact on organizations can be significant, both financially and reputationally. To mitigate these risks, organizations must take a multi-faceted approach that includes technology

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Prakash Prasad

Author | Founder of Intelligence School | International Institute of Financial Intelligence | Blockchain Researcher| https://intelligenceschool.org.in/