Modeling Government 
Interventions in a Natural 
Catastrophe Insurance Market 
5th International Disaster and Risk Confere...
5th International Disaster and Risk Conference IDRC 2014 
‘Integrative Risk Management - The role of science, technology &...
• Integrative (Economics, Decision Science, Engineering) 
• System-of-Systems 
• Full information on probabilities and los...
5th International Disaster and Risk Conference IDRC 2014 
‘Integrative Risk Management - The role of science, technology &...
Case study-Region of North Carolina, USA 
5th International Disaster and Risk Conference IDRC 2014 
‘Integrative Risk Mana...
5th International Disaster and Risk Conference IDRC 2014 
‘Integrative Risk Management - The role of science, technology &...
5th International Disaster and Risk Conference IDRC 2014 
120% 
100% 
80% 
60% 
40% 
20% 
‘Integrative Risk Management - T...
5th International Disaster and Risk Conference IDRC 2014 
$6.00 
$5.00 
$4.00 
$3.00 
$2.00 
$1.00 
‘Integrative Risk Mana...
5th International Disaster and Risk Conference IDRC 2014 
$180 
$160 
$140 
$120 
$100 
$80 
$60 
$40 
$20 
‘Integrative R...
5th International Disaster and Risk Conference IDRC 2014 
‘Integrative Risk Management - The role of science, technology &...
5th International Disaster and Risk Conference IDRC 2014 
‘Integrative Risk Management - The role of science, technology &...
Added value for the Post 2015 Framework for 
5th International Disaster and Risk Conference IDRC 2014 
‘Integrative Risk M...
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IDRC14-ppp kruse2

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5th International Disaster and Risk Conference IDRC 2014 Integrative Risk Management - The role of science, technology & practice 24-28 August 2014 in Davos, Switzerland

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  1. 1. Modeling Government Interventions in a Natural Catastrophe Insurance Market 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org Yang Gao1, Linda Nozick2, Rachel Davidson3, Jamie Kruse4 1Cornell University, Ithaca, New York, U.S.A. 2Cornell University, Ithaca, New York, U.S.A. 3University of Delaware, Newark, Delaware, U.S.A. 4East Carolina University, Greenville, North Carolina, U.S.A. Supported by the National Institute for Standards and Technology, U.S. Department of Commerce
  2. 2. 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org • Goal: Compare the effect of government interventions designed to reduce uninsured losses. • Model insurance market with explicit representation of the key stakeholders: – Homeowners – Primary insurers – Reinsurer – Policy maker • Government intervenes through premium price supports, acquisition decisions.
  3. 3. • Integrative (Economics, Decision Science, Engineering) • System-of-Systems • Full information on probabilities and loss distribution based 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org on structural characteristics and location of structure. • Demand for insurance is generated by rational risk averse homeowners. • Reinsurance is pricing formula-based • Game theoretic representation of firm(s) in primary insurance market (Cournot) • Game theoretic representation of policy maker (Stackelberg)
  4. 4. 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org Modeling Framework
  5. 5. Case study-Region of North Carolina, USA 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org Loss Model • Total inventory of 931,902 structures. (1536 types of construction) • Joint probability distribution estimation of annual loss for each type of building under each possible hurricane event. • 2000 scenarios, 97 types of hurricane events, 30 year duration. • Take-up rate on insurance at a given price generates book of business with expected loss and cost function for primary insurer based on loss model. – Two further constraints • Affordability: total policy price may not exceed 5% of total value of home. • Insurer will not service a policy at a total policy price less than $100
  6. 6. 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org Government interventions • Government can subsidize insurance or acquire homes in the high risk region. With a 30 year budget for public expenditure. – None – $300 million – $500 million – $1 billion – $3 billion
  7. 7. 5th International Disaster and Risk Conference IDRC 2014 120% 100% 80% 60% 40% 20% ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org 0% 1.36 1.48 1.60 1.72 1.84 1.96 2.08 2.20 2.32 2.44 2.56 2.68 2.80 2.92 3.04 3.16 3.28 3.40 3.52 3.64 3.76 3.88 4.00 4.12 4.24 4.36 4.48 4.60 4.72 4.84 4.96 5.08 5.20 5.32 Insurance penetration rate Price per dollar expected loss - pH Unaided $300 Million $500 Million $1 Billion $3 Billion
  8. 8. 5th International Disaster and Risk Conference IDRC 2014 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org $- 1 2 3 4 5 6 7 8 9 10 Equilibrium Price per dollar expected loss - pv Number of Insurers - n No support $300M support $1B support
  9. 9. 5th International Disaster and Risk Conference IDRC 2014 $180 $160 $140 $120 $100 $80 $60 $40 $20 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org $- 1 2 3 4 5 6 7 8 9 10 Average Annual Net Profit (million) Number of Insurers = n No support $300M support $1B support
  10. 10. 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org Total expected insured loss (a) and equilibrium penetration rate (b)
  11. 11. 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org Conclusions based on case study • Subsidization – Increased insurance take up rate. – Increased equilibrium penetration rate. – Reduced uninsured losses. – Produced little change in primary insurer profits. • Future Work includes – Boundedly rational homeowner decisions – Temporal response to recent events – Policy that is responsive to behavioral biases.
  12. 12. Added value for the Post 2015 Framework for 5th International Disaster and Risk Conference IDRC 2014 ‘Integrative Risk Management - The role of science, technology & practice‘ • 24-28 August 2014 • Davos • Switzerland www.grforum.org Disaster Risk Reduction • How did your work support the implementation of the Hyogo Framework for Action: – This research supports the goal in the Hyogo Framework for Action that calls for “development and strengthening of institutions, mechanisms and capacities to build resilience to hazards.” • From your perspective what are the main gaps, needs and further steps to be addressed in the Post 2015 Framework for Disaster Risk Reduction in – Research: work that integrates human behaviour and the temporal aspects of hazard mitigation. Analysis of behaviourally informed policy. – Education & Training: educate scientists on • how to communicate research result • assess policy implications of their works • how to receive messages from the stakeholder public on compelling research needs. – Implementation & Practice: – Policy: policy that is effective in light of behavioral biases

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