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Improving Catastrophe Modeling for Business Interruption Insurance Needs

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  • Adam Rose
  • Charles K. Huyck

Abstract

While catastrophe (CAT) modeling of property damage is well developed, modeling of business interruption (BI) lags far behind. One reason is the crude nature of functional relationships in CAT models that translate property damage into BI. Another is that estimating BI losses is more complicated because it depends greatly on public and private decisions during recovery with respect to resilience tactics that dampen losses by using remaining resources more efficiently to maintain business function and to recover more quickly. This article proposes a framework for improving hazard loss estimation for BI insurance needs. Improved data collection that allows for analysis at the level of individual facilities within a company can improve matching the facilities with the effectiveness of individual forms of resilience, such as accessing inventories, relocating operations, and accelerating repair, and can therefore improve estimation accuracy. We then illustrate the difference this can make in a case study example of losses from a hurricane.

Suggested Citation

  • Adam Rose & Charles K. Huyck, 2016. "Improving Catastrophe Modeling for Business Interruption Insurance Needs," Risk Analysis, John Wiley & Sons, vol. 36(10), pages 1896-1915, October.
    • Handle: RePEc:wly:riskan:v:36:y:2016:i:10:p:1896-1915
    DOI: 10.1111/risa.12550
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    References listed on IDEAS

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    1. Adam Rose & Shu‐Yi Liao, 2005. "Modeling Regional Economic Resilience to Disasters: A Computable General Equilibrium Analysis of Water Service Disruptions," Journal of Regional Science, Wiley Blackwell, vol. 45(1), pages 75-112, February.
    2. Rose Adam Z. & Oladosu Gbadebo & Lee Bumsoo & Asay Garrett Beeler, 2009. "The Economic Impacts of the September 11 Terrorist Attacks: A Computable General Equilibrium Analysis," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 15(2), pages 1-31, July.
    3. Grossi Patricia, 2009. "Property Damage and Insured Losses from the 2001 World Trade Center Attacks," Peace Economics, Peace Science, and Public Policy, De Gruyter, vol. 15(2), pages 1-18, July.
    4. Adam Rose & Gbadebo Oladosu & Shu‐Yi Liao, 2007. "Business Interruption Impacts of a Terrorist Attack on the Electric Power System of Los Angeles: Customer Resilience to a Total Blackout," Risk Analysis, John Wiley & Sons, vol. 27(3), pages 513-531, June.
    5. Adam Rose & Gbadebo Oladosu & Shu-Yi Liao, 2007. "Regional Economic Impacts of a Terrorist Attack on the Water System of Los Angeles: A Computable General Disequilibrium Analysis," Chapters, in: Harry W Richardson & Peter Gordon & James E. Moore II (ed.), The Economic Costs and Consequences of Terrorism, chapter 15, Edward Elgar Publishing.
    6. Thomas Hertel & David Hummels & Terrie L. Walmsley, 2014. "The vulnerability of the Asian supply chain to localized disasters," Chapters, in: Benno Ferrarini & David Hummels (ed.), Asia and Global Production Networks, chapter 3, pages 81-111, Edward Elgar Publishing.
    7. Stéphane Hallegatte, 2008. "An Adaptive Regional Input‐Output Model and its Application to the Assessment of the Economic Cost of Katrina," Risk Analysis, John Wiley & Sons, vol. 28(3), pages 779-799, June.
    8. Adam Rose & Dan Wei, 2013. "Estimating The Economic Consequences Of A Port Shutdown: The Special Role Of Resilience," Economic Systems Research, Taylor & Francis Journals, vol. 25(2), pages 212-232, June.
    9. Stéphane Hallegatte, 2008. "An adaptive regional input-output model and its application to the assessment of the economic cost of Katrina," Post-Print hal-00716550, HAL.
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    Cited by:

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    2. Joost Santos & Christian Yip & Shital Thekdi & Sheree Pagsuyoin, 2020. "Workforce/Population, Economy, Infrastructure, Geography, Hierarchy, and Time (WEIGHT): Reflections on the Plural Dimensions of Disaster Resilience," Risk Analysis, John Wiley & Sons, vol. 40(1), pages 43-67, January.
    3. Adachi, Daisuke & Nakata, Hiroyuki & Sawada, Yasuyuki & Sekiguchi, Kunio, 2023. "Adverse selection and moral hazard in corporate insurance markets: Evidence from the 2011 Thailand floods," Journal of Economic Behavior & Organization, Elsevier, vol. 205(C), pages 376-386.
    4. J. A. León & M. Ordaz & E. Haddad & I. F. Araújo, 2022. "Risk caused by the propagation of earthquake losses through the economy," Nature Communications, Nature, vol. 13(1), pages 1-11, December.
    5. Arnaud Mignan, 2022. "Categorizing and Harmonizing Natural, Technological, and Socio-Economic Perils Following the Catastrophe Modeling Paradigm," IJERPH, MDPI, vol. 19(19), pages 1-32, October.
    6. Mahmoud, Hussam & Kirsch, Thomas & O'Neil, Dan & Anderson, Shelby, 2023. "The resilience of health care systems following major disruptive events: Current practice and a path forward," Reliability Engineering and System Safety, Elsevier, vol. 235(C).

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