Aon Points to Area Diversification as Cloud Risk Strategy

A recent study by Parametrix and Aon pointed to geographical diversification as a solution for how companies can pursue digital transformations whilst minimising risk.

“By infusing Aon’s Global Industry Exposure Database with our own understanding of companies’ cloud behaviour and reliance, we have distilled some concrete insights into the potential for cloud diversification,” explains says Crystal Boch, US Head of Cyber Analytics at Aon’s Reinsurance Solutions.

The study leverages Aon's Global Industry Exposure Database and Parametrix's cloud monitoring proprietary analytics tools to assess the interdependencies of critical third-party digital services. 

With approximately US$8bn in cyber risk premium analysed, the findings cover a substantial portion of the global market.

Cloud diversification dynamics

In an era where digital transformation is paramount, the reliance on cloud services has become a critical component for businesses worldwide. 

However, this dependence also introduces significant risks, particularly systemic cloud outages that can disrupt operations on a massive scale. 

The core insight from the study is that cloud outage losses can be diversified within large (re)insurance portfolios by underwriting risks that span across continents. 

For instance, the correlation coefficient between cloud usage in Japan and Europe is -0.13, indicating a low correlation and thus a high potential for diversification.

Conversely, the correlation between the US West Coast and East Coast is 0.60, suggesting less diversification potential within the same country.

“The mainstream belief has been that diversification of cloud risk was almost impossible to achieve,” says Sharon Haran, Head of Parametrix Analytics. “However, our portfolio modelling uncovers the clear advantages to be gained by writing a portfolio that spans the globe. We now know how to help our risk carriers manage one of the two key systemic cyber risks.”

Reducing costs through diversification

This idea of reducing costs associated with insurance may become an increasingly attractive prospect for companies. 

Cyber insurance costs have been spiralling as of late. This is compiled by the recent CrowdStrike outage, which the knock on effects a cyber incident can have and the aggregated costs that can come with it.

“In the past few years, the cyber (re)insurance market has focused on identifying and quantifying cyber aggregation events,” says Crystal.

Geographical diversification offers a viable solution to mitigate the risks associated with cloud concentration. 

Conversely, the correlation between the US West Coast and East Coast is 0.60, suggesting less diversification potential within the same country.

“The mainstream belief has been that diversification of cloud risk was almost impossible to achieve,” says Sharon Haran, Head of Parametrix Analytics. “However, our portfolio modelling uncovers the clear advantages to be gained by writing a portfolio that spans the globe. We now know how to help our risk carriers manage one of the two key systemic cyber risks.”

Reducing costs through diversification

This idea of reducing costs associated with insurance may become an increasingly attractive prospect for companies. 

Cyber insurance costs have been spiralling as of late. This is compiled by the recent CrowdStrike outage, which the knock on effects a cyber incident can have and the aggregated costs that can come with it.

“In the past few years, the cyber (re)insurance market has focused on identifying and quantifying cyber aggregation events,” says Crystal.

Geographical diversification offers a viable solution to mitigate the risks associated with cloud concentration. 

By distributing cloud services across different regions and providers, businesses can reduce their exposure to systemic outages.

For instance, if their data centre they rely on in Norway goes down, operations can still remain online if they have providers in Nevada, US too. 

This strategy not only enhances resilience but also provides a buffer against the potential failures of any single provider.

Embracing multi-cloud strategies

As the cloud landscape continues to evolve, particularly with the rise of AI, addressing concentration risks will be crucial for maintaining business continuity, resilience and keeping control on both insurance costs and downtime costs. 

Organisations must adopt strategies to diversify their cloud usage and build resilience. By spreading cloud services across different regions and providers, businesses can enhance their resilience and safeguard against potential disruptions. 

As the digital landscape becomes increasingly complex, adopting such strategies will be essential for sustaining operations and fostering innovation in the face of emerging challenges.

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