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

T. Ermolieva, Tatiana Filatova, Y. Ermoliev, M. Obersteiner, K.M. de Bruijn, A. Jeuken

Research output: Contribution to journalArticleAcademicpeer-review

10 Citations (Scopus)
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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.
Original languageEnglish
Pages (from-to)82-98
JournalRisk analysis
Volume37
Issue number1
DOIs
Publication statusPublished - 10 Mar 2017

Keywords

  • METIS-316252
  • IR-100059

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