title: Flood Catastrophe Model for Designing Optimal Flood Insurance Program: Estimating Location-Specific Premiums in the Netherlands.
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.
authors.affiliation: International Institute for Applied Systems Analysis, Laxenburg, Austria.
authors.forename: T
authors.initials: T
authors.lastname: Ermolieva
authors.affiliation: University of Twente, NB Enschede, The Netherlands.|Deltares, MH Delft, The Netherlands.
authors.forename: T
authors.initials: T
authors.lastname: Filatova
authors.affiliation: International Institute for Applied Systems Analysis, Laxenburg, Austria.
authors.forename: Y
authors.initials: Y
authors.lastname: Ermoliev
authors.affiliation: International Institute for Applied Systems Analysis, Laxenburg, Austria.
authors.forename: M
authors.initials: M
authors.lastname: Obersteiner
authors.affiliation: Deltares, MH Delft, The Netherlands.
authors.forename: K M
authors.initials: KM
authors.lastname: de Bruijn
authors.affiliation: Deltares, MH Delft, The Netherlands.
authors.forename: A
authors.initials: A
authors.lastname: Jeuken
keywords: Flood risk; loss-sharing programs; quantile-related stochastic optimization; spatial catastrophe model