Flood Catastrophe Model for Designing Optimal Flood Insurance Program: Estimating Location-Specific Premiums in the Netherlands

Ermolieva T, Filatova T, Ermoliev Y, Obersteiner M, de Bruijn K M, & Jeuken A (2016). Flood Catastrophe Model for Designing Optimal Flood Insurance Program: Estimating Location-Specific Premiums in the Netherlands. Risk Analysis: 1-17. DOI:10.1111/risa.12589.

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Project: Economics of climate change adaptation in Europe (ECONADAPT, FP7 603906)

Abstract

As flood risks grow worldwide, a well-designed insurance program engaging various stakeholders becomes a vital instrument in flood risk management. The main challenge concerns the applicability of standard approaches for calculating insurance premiums of rare catastrophic losses. This article focuses on the design of a flood-loss-sharing program involving private insurance based on location-specific exposures. The analysis is guided by a developed integrated catastrophe risk management (ICRM) model consisting of a GIS-based flood model and a stochastic optimization procedure with respect to location-specific risk exposures. To achieve the stability and robustness of the program towards floods with various recurrences, the ICRM uses stochastic optimization procedure, which relies on quantile-related risk functions of a systemic insolvency involving overpayments and underpayments of the stakeholders. Two alternative ways of calculating insurance premiums are compared: the robust derived with the ICRM and the traditional average annual loss approach. The applicability of the proposed model is illustrated in a case study of a Rotterdam area outside the main flood protection system in the Netherlands. Our numerical experiments demonstrate essential advantages of the robust premiums, namely, that they: (1) guarantee the program's solvency under all relevant flood scenarios rather than one average event; (2) establish a tradeoff between the security of the program and the welfare of locations; and (3) decrease the need for other risk transfer and risk reduction measures.

Item Type: Article
Uncontrolled Keywords: Flood risk; loss-sharing programs; quantile-related stochastic optimization; spatial catastrophe model
Research Programs: Ecosystems Services and Management (ESM)
Depositing User: Michaela Rossini
Date Deposited: 29 Mar 2016 12:33
Last Modified: 09 Mar 2017 10:50
URI: http://pure.iiasa.ac.at/12333

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