financial management for catastrophic flood risks: peak runoff index insurance shu-ling chen dept....

Financial Management for Catastrophic Flood Risks: Peak Runoff Index Insurance

Shu-Ling ChenDept. of Finance and Cooperative Management, National Taipei University

Jow-Ran ChangDept. of Quantitative Finance, National Tsing Hua University

APEC Typhoon Symposium–Lessons Learned from Disastrous Typhoons

Institute of Manila, the Philippines, Nov 24-25, 2015

Presentation Outlines

• Motivation• Weather-related risks• Research question• Objectives• Methodology• Preliminary Results and Contribution

APEC Typhoon Symposium, Nov. 24-25, 2015

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Number of Catastrophic Events:1970-2014

Source: Swiss Re Economic Research & Consulting and Cat Perils, sigma No 2/2015


189 natural & 147 man-

made disasters in

2014

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Insured Catastrophic Losses: 1970-2014 (in USD billion at 2014 prices)

Source: Swiss Re Economic Research & Consulting and Cat Perils, sigma No 2/2015


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Catastrophic Losses• The United Nations Office for Disaster Risk Reduction (UNISDR) –

“The Human Cost of Weather Related Disasters 1995-2015” ▫ “… economic losses from weather-related disasters are much

higher than the recorded figure of US$1.891 trillion, which accounts for 71% of all losses attributed to natural hazards over the twenty-year period.”

▫ “In total, an average of 335 weather-related disasters were recorded per year between 2005 and 2014, an increase of 14% from 1995-2004, and almost twice the level recorded during 1985-1995.”

▫ “Floods accounted for 47% of all weather-related disasters from 1995-2015, affecting 2.3 billion people and killing 157,000. Storms were the deadliest type of weather-related disaster, accounting for 242,000 deaths or 40% of the global weather-related deaths, with 89% of these deaths occurring in lower-income countries.”


Catastrophic Risks in Taiwan

• Taiwan exposures to numerous of extreme catastrophe risks, including typhoons, floods, drought, frost damage and earthquake.

• Typhoon is the major cause of weather-related damages to Taiwan.

• The bulk of the damages, however, were not directly attributable to excessive winds, but rather to the flooding and mudslides caused by sustained rainfalls.


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Damages of Typhoon Morakot in 2009• The deadliest typhoon in history, typhoon Morakot in 2009,

produced sustained amounts of rainfall, which triggered mudslides and severe flooding through southern Taiwan.

• Typhoon Morakot not only caused roughly US$4.7 billion damages to Taiwan agricultural and fishery industries, but one of triggered mudslides even buried the entire town of Xiaolin killing 500 people in the village alone.


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• During Typhoon Morakot duration, more than 73% of land use in agricultural and fishery industries was affected by water from the Kaoping River (Lee et al., 2011).

Source: Lee et al. (2011), 莫拉克颱風降雨事件對災區流域之土地利用衝擊 .


Accumulated Rainfall on Aug. 05-10, 2009Typhoon Morakot

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Agricultural Risk Management in Taiwan

• Taiwan agricultural producers lack access to formal insurance and derivative markets, such as futures, options and crop insurance, for the management of production risk in Taiwan.

• Alternatively, they rely heavily on government disaster assistance, such as natural disaster aid funds and low–rate loans for agricultural producers, in times of catastrophic losses due to typhoons, droughts and floods.


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Research Objectives• To help protect agricultural producers against

catastrophic weather events,▫ we explore optimal designs for a flood-related index

insurance scheme that would be appropriate for agricultural producers in Southwest Taiwan, and

▫ we design and perform an actuarial assessment of a contract that would provide indemnities in Southwest Taiwan based on peak runoff experienced during a typhoon.


Examples of Flood-Related Index Insurance

• Indices that have been employed or proposed in the design of flood-related index insurance contracts include rainfall and recorded water level in the river▫ USA – a flood-related index insurance based on rainfall

level▫ Mexico – a flood-related index insurance based on

accumulated rainfall▫ Vietnam – a flood-related index insurance, based on the

recorded water levels in the Mekong and Red River Deltas using river gauge data, is offered to the Vietnam Bank of Agricultural and Rural Development


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• According to hydrology cycle for a watershed,Input of a watershed = storage + output,

where input is the rainfall, storage are interception, infiltration and groundwater, and output are evapotranspiration and runoff.

Source: Earthscape. http://www.und.nodak.edu/instruct/eng/fkarner/earth.htm


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http://www.und.nodak.edu/instruct/eng/fkarner/earth.htm

Objectives

• Alternative to the conventional rainfall index, we

▫ propose a peak runoff index insurance in Southern Taiwan based on peak runoff experienced during a typhoon, and

▫ assess its actuarial properties with the other two alternatives, accumulated rainfall and average rainfall level.


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Methodology

• We apply a storage function model proposed by Kimura (1962) to compute runoff of a watershed.

S1 = KQp,

where S1 is the discharge storage of rainfall over the watershed, Q is the flood runoff, K and p are parameters which must be defined.


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Methodology

• We begin by optimizing the parameters of the storage function for single and multiple storms.

• Based on a cluster analysis of storm patterns, we estimate regional storage function using multivariate regression techniques, and using Harr’s Point Estimation and Monte Carlo Simulation methods, assess uncertainty regarding the storage function parameters.


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Data

• Our research employs 1990-2009 weather and flow data from Central Weather Bureau and Water Resources Agency, Ministry of Economic Affairs in Taiwan.

▫ 39 typhoons are selected during the time period.▫ Typhoon duration starts when a sea warning is

issued by Central Weather Bureau and ends as soon as the typhoon warning is terminated.

▫ One flow station, Sandimen, and two rainfall stations in Kaoping River are selected to obtain the rainfall and storage discharge data.


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Correlation between Weather Index vs. Agricultural Production Losses in Different Regions


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Weather IndexKaohsiun

gPingtong

Southern Taiwan

Accumulated Rainfall 0.738 0.355 0.675

Average Rainfall 0.673 0.261 0.582

Peak Runoff 0.767 0.490 0.757

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Runoff in 2009 Typhoon Morakot


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Histogram of Peak Runoff


Peak Runoff

Actuarial Rating for Flood-Related Index Insurances

　 Average Rainfall PeakRunoff

Dollar per Point $25 $5

Trigger Value 50mm/day 100m3/S

Premium NT$7,223.40 NT$5,746.90


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Contribution• Peak runoff index has higher correlation than

accumulated rainfall index and average rainfall index to agricultural losses in Southern Taiwan.

• Our results indicate that, with optimal choices of contract parameters, an insurance contract based on a peak runoff index can offer better coverage against widespread flooding cased by typhoons at reasonable premium rates.

• To our knowledge, our proposed peak runoff index insurance contract is the first to be designed around a peak river flow index.


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Thank you for Listening.

financial management for catastrophic flood risks: peak runoff index insurance shu-ling chen dept....

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