Flood Risk Insurance: A Micro-Economic Foundation

35 Pages Posted: 15 Sep 2022

See all articles by Tim J. Boonen

Tim J. Boonen

University of Amsterdam

Wing Fung Chong

Heriot-Watt University - Department of Actuarial Mathematics and Statistics

Mario Ghossoub

University of Waterloo

Date Written: September 1, 2022

Abstract

Flood risk has consistently been ranked as one of the major emerging risks, with the potential of having a substantial systemic impact on the insurance industry. In this paper, we provide a micro-economic foundation for a flood risk insurance market. Specifically, we characterize Pareto-optimal risk-sharing contracts in a market with multiple policyholders and one representative insurer. With minimal assumptions on the risk measures of the parties involved, we characterize Pareto optimality in terms of the minimization of a sum of the agents' risk positions, and we relate it to both the core and coalitional stability of an associated market game. In the special case of coherent risk measures, the optimal indemnity schedules are further characterized in explicit form, in terms of what can be called "worst-case probability measures". Finally, we provide a numerical illustration of our results.

Keywords: Climate change, flood risk, spatial diversification, Pareto optimality, layer-type indemnities

Suggested Citation

Boonen, Tim J. and Chong, Wing Fung and Ghossoub, Mario, Flood Risk Insurance: A Micro-Economic Foundation (September 1, 2022). Available at SSRN: https://ssrn.com/abstract=4206423 or http://dx.doi.org/10.2139/ssrn.4206423

Tim J. Boonen

University of Amsterdam ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

HOME PAGE: http://www.uva.nl/profiel/b/o/t.j.boonen/t.j.boonen.html

Wing Fung Chong

Heriot-Watt University - Department of Actuarial Mathematics and Statistics ( email )

Edinburgh, Scotland EH14 4AS
United Kingdom

Mario Ghossoub (Contact Author)

University of Waterloo ( email )

Dept. of Statistics & Actuarial Science
200 University Ave. W.
Waterloo, Ontario N2L 3G1
Canada

HOME PAGE: http://uwaterloo.ca/scholar/mghossou

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