Berliner criteria
Set of theoretical conditions defining the characteristics a risk must possess to be insurable by the private market, formalized by Baruch Berliner in 1982.
The Berliner criteria are a reference framework of insurance theory, formulated by Baruch Berliner in Limits of Insurability of Risks (Prentice Hall, 1982). Berliner sets out nine necessary conditions, grouped in three dimensions. The actuarial dimension requires that losses occur randomly and independently, which enables pooling; that average frequency and severity be estimable from sufficient historical data; that the maximum potential loss remain bounded and fundable from the insurer's capital; and that the required premium be economically viable. The behavioral dimension requires that moral hazard stay manageable, the insured not being able to influence loss probability undetected, and that adverse selection stay controllable. The social and regulatory dimension requires that no legal or public policy restriction weigh on underwriting the risk, and that the premium respect market constraints. The criteria are not binary but continuous: when a condition partially deteriorates, insurability does not disappear, it translates into higher premiums, larger deductibles, sub-limits or exclusions. Physical climate risk and systemic cyber risk break several of these criteria at the same time, which explains the market withdrawals we have seen.
Applied to cyber accumulation risk, the Berliner criteria reveal three simultaneous failures: independence of losses is compromised (near-perfect technological correlation in a CrowdStrike scenario), frequency estimability is compromised (insufficient and evolving data), and maximum loss remains difficult to bound (accumulation potential of 20 to 46 billion dollars at a bicentennial horizon per Munich Re). It is this convergence of failures that makes systemic underwriting unprofitable for the private sector alone.
Berliner criteria, insurability criteria, limits of insurability
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