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10-Dec-2011

Financial Risks Patterns in Cyber Space


Every aggregation industry in the world involves risk transfer and substantial (in the billions) insurance markets for catastrophic financial or legal events - except for cloud computing. Traditional industries that leverage insurance markets range from banking to property to energy to transportation- yes, even rental cars. However the cloud computing industry is an emerging aggregator industry with enormous promise and equally large unseen risks. Prediction: a massive risk transfer market for cloud-computing will soon take hold through the powerful force of sheer economics.

All industries in the world have risk, some are operational and others are more systemic. From time to time and within high growth emerging industries (like cloud computing), some market leading companies can temporarily deny the financial risks to themselves (and their clients) until the inevitable economics of risk slow their own business growth. Risk denial is running its course for major cloud leaders, even though the business world needs the long-term benefits of cloud computing more than ever. This confluence of events - increasing risk against reduced acknowledgment of the risk - creates both a problem and an opportunity for cloud companies.

Free trade economic supply and demand conditions implicitly rely on financial sustainability against risk uncertainty for continued success against the backdrop of real regulatory intervention from unaffiliated entities. Undervalued and misunderstood risk creates uncertainty in any marketplace. The uncertainties facing the emerging cloud-computing marketplace are the questions surrounding important risks such data privacy, security and business interruption. The marketplace as a whole faces challenges addressing and affirmatively assessing these uncertainties as more cloud users assess the true cost-benefit advantage of cloud adoption. The cost to use the cloud must also be balanced with an accounting for the cost to fail.

Cloud Companies Are Not in the Business of Risk
Long-term successful performance by cloud vendors and continued adoption of their services by cloud clients necessitates an affirmative answer to the following question: who's financially liable when something unexpected occurs? Both cloud vendors and cloud users are spending valuable time and resources assessing what the insurance industry already has the capacity to answer. In fact, two parties are trying to solve what a third industry has previously mastered: risk valuation, risk hedging, and risk transfer.

Both the insurance and cloud computing industries are facing unprecedented times in their respective macro-economic market environments because of recent surges in competition for market share. The easier availability of, and independent demand for, cloud technologies and insurance products alike has resulted in lower pricing levels, diversified product offerings and overall saturated market conditions - necessitating creative innovation from organizations looking to remain a top competitor in their respective spaces. Managing "big data" within the clouds has become big business. Managing "big data risk" through a new breed of financial intstruments is an equally large puzzle to solve.

Risk Visibility
Fundamentally, cloud service adoption means organizations must no longer invest in internal IT infrastructure to utilize various software packages, platform services, infrastructure stacks, or data processing services. Companies are handing over these essential business functions to cloud vendors - and they are handing these responsibilities over rapidly.

The current enigma here is that most companies believe that the shift of computing resources and responsibilities to a cloud vendor includes the transference of the implied and inherent financial liabilities for data loss, data corruption and/or business interruption. This presumption is emphatically not true, and this presumption is especially concerning for cloud customers because our trading data shows that the "cost to fail" with technology is rapidly outpacing the "cost to use" technology. Our staff of risk professionals, security specialists, and aerospace engineers has designed and developed proprietary and predictive risk models within a business intelligence platform called "CyberFactors." Since the last two years in particular, our IT risk data reveals aggregate cost curves of business risk that will impact every business in every industry in varying degrees...and soon will create a much needed risk transfer marketplace for Cloud Insurance. The question is, when?

Published Mar. 8, 2011

http://www.sys-con.com/node/1741826

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