A Probabilistic Paradigm for the Parametric Insurance of Natural Hazards

Abstract

There is a pressing need for simple and reliable risk transfer mechanisms that can pay out quickly after natural disasters without delays caused by loss estimation, and the need for long historical claims records. One such approach, known as parametric insurance, pays out when a key hazard variable exceeds a predetermined threshold. However, this approach to catastrophe risk, based on making deterministic binary predictions of loss occurrence, is susceptible to basis risk (mismatch between payouts and realized losses). A more defensible approach is to issue probabilistic predictions of loss occurrence, which then allows uncertainty to be properly quantified, communicated, and evaluated. This study proposes a generic probabilistic framework for parametric trigger modeling based on logistic regression, and idealized modeling of potential damage given knowledge of a hazard variable. We also propose various novel methods for evaluating the quality and utility of such predictions as well as more traditional trigger indices. The methodology is demonstrated by application to flood-related disasters in Jamaica from 1998 to 2016 using gridded precipitation data as the hazard variable. A hydrologically motivated transformation is proposed for calculating potential damage from daily rainfall data. Despite the simplicity of the approach, the model has substantial skill at predicting the probability of occurrence of loss days as demonstrated by traditional goodness-of-fit measures (i.e., pseudo-R of 0.55) as well as probabilistic verification diagnostics such as receiver operating characteristics. Using conceptual models of decisionmaker expenses, we also demonstrate that the system can provide considerable utility to involved parties, e.g., insured parties, insurers, and risk managers.

Understanding and strengthening the role of catastrophe lottery in catastrophe risk transfer system

“…At present, a catastrophe lottery is not part of this portfolio. The predisaster risk transfer tools of insurance mechanism include insurance, reinsurance, and financial derivatives also known as catastrophe bonds, risk swaps, options, loss guarantees and catastrophe equity puts (Figueiredo et al., 2018). Postdisaster risk transfer tools include international assistance, disaster relief and emergency response funds and donations.…”

Parametric Insurance—A Possible and Necessary Solution to Insure the Earthquake Risk of Romania

“…Parametric insurance is increasingly required as a tool to cover damages associated with the occurrence of various natural disasters. However, the models built for these products have to be agreed upon by policyholders, insurers and risk managers (Figueiredo et al 2018).…”

The Covid-19 Pandemic Effect on the Determining Chilli Crop Agricultural Insurance Premium

“…Researches on parametric insurance in agricultural insurance are developed recently because parametric insurance is seen as being able to help farmers, private companies, and the government in reducing losses due to crop failure [7]. The following are some studies on parametric insurance, namely the application of parametric insurance with moral hazard in loan contracts [8], parametric trigger modeling [9], and parametric insurance in managing natural disaster risk in African countries [10].…”