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, KM; Jeuken, A

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, KM Jeuken, A

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Publication Type:: Journal Article
Citation:: Risk Analysis, 2017, 37 (1), pp. 82 - 98
Issue Date:: 2017-01-01

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Field	Value	Language
dc.contributor.author	Ermolieva, T	en_US
dc.contributor.author	Filatova, T https://orcid.org/0000-0002-3546-6930	en_US
dc.contributor.author	Ermoliev, Y	en_US
dc.contributor.author	Obersteiner, M	en_US
dc.contributor.author	de Bruijn, KM	en_US
dc.contributor.author	Jeuken, A	en_US
dc.date.issued	2017-01-01	en_US
dc.identifier.citation	Risk Analysis, 2017, 37 (1), pp. 82 - 98	en_US
dc.identifier.issn	0272-4332	en_US
dc.identifier.uri	http://hdl.handle.net/10453/124854
dc.description.abstract	© 2016 Society for Risk Analysis 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.	en_US
dc.relation.ispartof	Risk Analysis	en_US
dc.relation.isbasedon	10.1111/risa.12589	en_US
dc.subject.classification	Strategic, Defence & Security Studies	en_US
dc.title	Flood Catastrophe Model for Designing Optimal Flood Insurance Program: Estimating Location-Specific Premiums in the Netherlands	en_US
dc.type	Journal Article
utslib.citation.volume	1	en_US
utslib.citation.volume	37	en_US
utslib.for	0102 Applied Mathematics	en_US
utslib.for	0907 Environmental Engineering	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Engineering and Information Technology
pubs.organisational-group	/University of Technology Sydney/Faculty of Engineering and Information Technology/School of Information, Systems and Modelling
pubs.organisational-group	/University of Technology Sydney/Strength - PERSWADE - Centre on Persuasive Systems for Wise Adaptive Living
utslib.copyright.status	closed_access
pubs.issue	1	en_US
pubs.publication-status	Published	en_US
pubs.volume	37	en_US

Abstract:

© 2016 Society for Risk Analysis 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.

Please use this identifier to cite or link to this item:

http://hdl.handle.net/10453/124854