Information security insurance isn’t practical
There are at least four ways with dealing with risks. One way is to accept a risk. This may be a good idea if the potential loss from an uncertain event isn’t very big or the uncertain event happens very rarely. For more significant risks, you might want to invest in either technology or additional processes to reduce the expected loss from an uncertain event to an acceptable level. Another way of dealing with a risk is to avoid it. If you think that the risk associated with using email can’t be addressed any other way, you can always stop using email, for example. The final alternative is to transfer a risk to a third party. Insurance policies are a common way to do this, and they essentially transfer the risk from the policy holder to the insurance company who offers the policy. In the case of information security it’s probably the case that options are more limited, and that using insurance to transfer risk may be impractical due to the nature of information security vulnerabilities.
The definition of "risk" as understood by risk managers is defined to be the loss that you expect to incur from events that have an unknown outcome. To quantify the risk associated with such an event, you multiply the probability of an event by the loss associated with the event. For example, if you have an event that will cause $1 million in loss if it occurs, but this event only happens with a 1 percent chance, then this event represents $10,000 in risk, or 1 percent of $1 million. Actuaries that estimate a risk to be $10,000 typically set the price of an insurance policy that covers the risk to be $10,000, plus whatever additional costs needed to cover the operating expenses of the insurance company.
In the case of the unknowns that information security deals with, we usually don't know either of the two values that are used to quantify a risk. It's very hard to accurately estimate the chances of security incidents happening, and it's equally hard to estimate to put a price on the damage caused by any incidents that do happen. This makes it difficult, if not impossible, for insurance companies to cover information security risks.
Suppose that you could go back in time to January 24, 2003. At that time, there was a known buffer overflow vulnerability that might have affected your implementation of Microsoft SQL Server 2000. This vulnerability had been known for at least six months, at least since July 24, 2002, but had not been exploited. Because of this, you might have estimated the chances of it being exploited as being fairly low. The very next day, however, the SQL Slammer Worm was released that took advantage of this vulnerability in a spectacular way. At that point, your assessment of the vulnerability would probably have changed dramatically.
This situation is probably very typical of security vulnerabilities. All software has bugs, and some of these bugs cause serious security vulnerabilities. Many of these vulnerabilities haven’t been found by security researchers yet. In the face of this unknown risk, how do you price an insurance policy? Perhaps a better question to ask is whether insurance is even practical for information security vulnerabilities. It’s probably not.
That’s why I wouldn’t be surprised if a significant market for information security insurance never comes into being. It’s probably not practical.