HURRICANE RISK MANAGEMENT WITH CLIMATE AND CO2 INDICES

Chia‐Chien Chang, Jen‐Wei Yang and Min‐Teh Yu

Journal of Risk & Insurance, 2018, vol. 85, issue 3, 695-720

Abstract: We propose a regime‐switching Poisson process incorporating climate and carbon dioxide (CO2) indices (RPCM) to model hurricane frequency. Model accuracy shows that two‐state RPCM (2‐RPCM) is superior to the existing climate methods, as forecast errors under 2‐RPCM are smaller than previous models by about 60–75 percent. We derive the pricing formula of reinsurance premiums by assuming the aggregate loss following the regime‐switching compound process. Pricing errors under 2‐RPCM for reinsurance premiums are 35–54 percent lower than those from previous models. The climate and regime‐switching effects dominate the CO2 effect in reducing pricing errors and producing more effective tail value at risk.

Date: 2018
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Persistent link: https://EconPapers.repec.org/RePEc:bla:jrinsu:v:85:y:2018:i:3:p:695-720

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