A Mutual Catastrophe Insurance Framework for Horizontal Collaboration in Prepositioning Strategic Reserves

Hani Zbib (), Burcu Balcik (), Marie-Ève Rancourt () and Gilbert Laporte ()
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Hani Zbib: University of Quebec in Montréal, Montréal, Quebec H2X 1L7, Canada; HEC Montréal, Montréal, Quebec H3T 2A7, Canada
Burcu Balcik: Ozyegin University, 34794 Istanbul, Turkey
Marie-Ève Rancourt: HEC Montréal, Montréal, Quebec H3T 2A7, Canada; CIRRELT, Montréal, Quebec H3C 3J7, Canada
Gilbert Laporte: HEC Montréal, Montréal, Quebec H3T 2A7, Canada; School of Management, University of Bath, Bath BA2 7AY, United Kingdom

Operations Research, 2024, vol. 72, issue 5, 2014-2041

Abstract: We develop a mutual catastrophe insurance framework for the prepositioning of strategic reserves to foster horizontal collaboration in preparedness against low-probability high-impact natural disasters. The framework consists of a risk-averse insurer pooling the risks of a portfolio of risk-averse policyholders. It encompasses the operational functions of planning the prepositioning network in preparedness for incoming insurance claims, in the form of units of strategic reserves, setting coverage deductibles and limits of policyholders, and providing insurance coverage to the claims in the emergency response phase. It also encompasses the financial functions of ensuring the insurer’s solvency by efficiently managing its capital and allocating yearly premiums among policyholders. We model the framework as a very large-scale nonlinear multistage stochastic program, and solve it through a Benders decomposition algorithm. We study the case of Caribbean countries establishing a horizontal collaboration for hurricane preparedness. Our results show that the collaboration is more effective when established over a longer planning horizon, and is more beneficial when outsourcing becomes expensive. Moreover, the correlation of policyholders affected simultaneously under the extreme realizations and the position of their claims in their global claims distribution directly affects which policyholders get deductibles and limits. This underlines the importance of prenegotiating policyholders’ indemnification policies at the onset of collaboration. Funding: G. Laporte and M.-È. Rancourt were funded by the Canadian Natural Sciences and Engineering Research Council (NSERC) [Grants 2015-06189 and 2022-04846]. Funding was also provided by the Institute for Data Valorisation (IVADO) and the Canada Research Chair in Humanitarian Supply Chain Analytics. B. Balcik was partially supported by a grant from the Scientific and Technological Research Council of Turkey (TUBITAK) 2219 program. This support is gratefully acknowledged. Supplemental Material: The online appendix is available at https://doi.org/10.1287/opre.2021.0141 .

Keywords: Policy Modeling and Public Sector OR; mutual catastrophe insurance; prepositioning; horizontal collaboration; multistage stochastic program; Benders decomposition (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:inm:oropre:v:72:y:2024:i:5:p:2014-2041

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