Risk modeling of property insurance claims from weather events

The localized nature of severe weather events leads to a concentration of correlated risks that can substantially amplify aggregate event-level losses. We propose a copula-based regression model for replicated spatial data to characterize the dependence between property damage claims arising from a common storm when analyzing its financial impact. The factor copula captures the location-based spatial dependence between properties, as well as the aspatial dependence induced by the common shock of experiencing the same storm. The framework allows insurers to flexibly incorporate the observed heterogeneity in marginal models of skewed, heavy-tailed, and zero-inflated insurance losses, while retaining the model interpretation in decomposing latent sources of dependence. We present a likelihood-based estimation to address the computational challenges from the discreteness and high dimensionality in the outcome of interest. Using hail damage insurance claims data from a US insurer, we demonstrate the effect of dependence on claims management decisions.