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Extremal Analysis of Flooding Risk and Management

Author

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  • Chengxiu Ling
  • Jiayi Li
  • Yixuan Liu
  • Zhiyan Cai

Abstract

Catastrophic losses caused by natural disasters receive a growing concern about the severe rise in magnitude and frequency. The constructions of insurance and financial management scheme become increasingly necessary to diversify the disaster risks. Given the frequency and severity of floods in China, this paper investigates the extreme analysis of flood-related huge losses and extreme precipitations using Peaks-Over-Threshold method and Point Process (PP) model. These findings are further utilized for both designs of flood zoning insurance and flooding catastrophic bond: (1) Using the extrapolation approach in Extreme Value Theory (EVT), the estimated Value-at-Risk (VaR) and conditional VaR (CVaR) are given to determine the cross-regional insurance premium together with the Grey Relational Analysis (GRA) and the Technique for Order Preference by Similarity to an Ideal Solution (TOPSIS). The flood risk vulnerability and threat are analyzed with both the geography and economic factors into considerations, leading to the three layered premium levels of the 19 flood-prone provinces. (2) To hedge the risk for insurers and reinsurers to the financial market, we design a flooding catastrophe bond with considerate trigger choices and the pricing mechanism to balance the benefits of both reinsurers and investors. To reflect both the market price of catastrophe risk and the low-correlated financial interest risk, we utilize the pricing mechanism of Tang and Yuan (2021) to analyze the pricing sensitivity against the tail risk of the flooding disaster and the distortion magnitude and the market risk through the distortion magnitude involved in Wang's transform. Finally, constructive suggestions and policies are proposed concerning the flood risk warning and prevention.

Suggested Citation

  • Chengxiu Ling & Jiayi Li & Yixuan Liu & Zhiyan Cai, 2021. "Extremal Analysis of Flooding Risk and Management," Papers 2112.00562, arXiv.org.
  • Handle: RePEc:arx:papers:2112.00562
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    References listed on IDEAS

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    1. Junfei Chen & Guiyun Liu & Liu Yang & Quanxi Shao & Huimin Wang, 2013. "Pricing and Simulation for Extreme Flood Catastrophe Bonds," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 27(10), pages 3713-3725, August.
    2. Chien-Ta Ho, 2006. "Measuring bank operations performance: an approach based on Grey Relation Analysis," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 57(4), pages 337-349, April.
    3. Tang, Qihe & Yuan, Zhongyi, 2019. "Cat Bond Pricing Under A Product Probability Measure With Pot Risk Characterization," ASTIN Bulletin, Cambridge University Press, vol. 49(2), pages 457-490, May.
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    Cited by:

    1. See, Justin & Cuaton, Ginbert Permejo & Placino, Pryor & Vunibola, Suliasi & Thi, Huong Do & Dombroski, Kelly & McKinnon, Katharine, 2024. "From absences to emergences: Foregrounding traditional and Indigenous climate change adaptation knowledges and practices from Fiji, Vietnam and the Philippines," World Development, Elsevier, vol. 176(C).

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