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Hurricane Risk Management With Climate And Co2 Indices

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  • Chia‐Chien Chang
  • Jen‐Wei Yang
  • Min‐Teh Yu

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.

Suggested Citation

  • Chia‐Chien Chang & Jen‐Wei Yang & Min‐Teh Yu, 2018. "Hurricane Risk Management With Climate And Co2 Indices," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 85(3), pages 695-720, September.
    • Handle: RePEc:bla:jrinsu:v:85:y:2018:i:3:p:695-720
    DOI: 10.1111/jori.12182
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    Cited by:

    1. Elroi Hadad & Tomer Shushi & Rami Yosef, 2023. "Measuring Systemic Governmental Reinsurance Risks of Extreme Risk Events," Risks, MDPI, vol. 11(3), pages 1-11, February.
    2. Reda, Francesco & Fatima, Zarrin, 2019. "Northern European nearly zero energy building concepts for apartment buildings using integrated solar technologies and dynamic occupancy profile: Focus on Finland and other Northern European countries," Applied Energy, Elsevier, vol. 237(C), pages 598-617.
    3. Tai, Vivian W. & Lai, Yi-Hsun & Yang, Tung-Hsiao, 2020. "The role of the board and the audit committee in corporate risk management," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    4. Zhao, Yang & Yu, Min-Teh, 2019. "Measuring the liquidity impact on catastrophe bond spreads," Pacific-Basin Finance Journal, Elsevier, vol. 56(C), pages 197-210.
    5. Chang Carolyn W. & Feng Yalan, 2021. "Hurricane Bond Price Dependency on Underlying Hurricane Parameters," Asia-Pacific Journal of Risk and Insurance, De Gruyter, vol. 15(1), pages 1-21, January.
    6. Chang, Carolyn W. & Wang, Yu-Jen & Yu, Min-Teh, 2020. "Catastrophe bond spread and hurricane arrival frequency," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).

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