Climate Projections, Teleconnections and Estimating Risks for Index-Based Insurance

• Activity Number: 382 - Novel Statistical Methodology for Insurance and Risk Management
• Type: Invited
• Date/Time: Tuesday, July 31, 2018 : 2:00 PM to 3:50 PM
• Sponsor: Section on Risk Analysis
• Author(s): Robert James Erhardt* and Zhuoli Jin and Leland Kent
• Companies: Wake Forest University and Wake Forest University and Wake Forest University
• Keywords: actuarial science; El Nino; NARCCAP; regional climate model; weather derivative

Abstract

Index-based insurance is a product whose payments are determined from the settlement value of some underlying index. Here we consider insurance products whose payments are based on weather indices. Examples include payouts triggered by high wind speeds, excessive rainfall, or unusually hot or cold temperatures over some time period. Unlike traditional insurance -- whose payments are determined from realized losses -- index-based insurance payments are determined directly from weather causes of potential loss. Actuarial risks are estimated from the distribution of payments, which is itself a function of the predictive distribution of the weather index, and therefore statistical models for weather variables play an essential role. In this talk we discuss the use of climate teleconnections, such as El Nino, along with regional climate model output to explore actuarial risk measures of weather index-based insurance products in the medium and long term.