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Development of the Black–Scholes Model for Determining Insurance Premiums to Mitigate the Risk of Disaster Losses Using the Principles of Mutual Cooperation and Regional Economic Growth

Author

Listed:
  • Titi Purwandari

    (Department of Statistics, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Yuyun Hidayat

    (Department of Statistics, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Sukono

    (Department of Mathematics, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Kalfin

    (Doctoral Program of Mathematics, Universitas Padjadjaran, Sumedang 45363, Indonesia
    Program Study of Statistics, Matana University, Banten 45363, Indonesia)

  • Riza Andrian Ibrahim

    (Doctoral Program of Mathematics, Universitas Padjadjaran, Sumedang 45363, Indonesia)

  • Subiyanto

    (Department of Marine Science, Universitas Padjadjaran, Sumedang 45363, Indonesia)

Abstract

The frequency and economic damage of natural disasters have increased globally over the last two decades due to climate change. This increase has an impact on the disaster insurance field, particularly in the calculation of premiums. Many regions have a shortcoming in employing insurance because the premium is too high compared with their budget allocation. As one of the solutions, the premium calculation can be developed by applying the cross-subsidies mechanism based on economic growth. Therefore, this research aims to develop premium models of natural disaster insurance that uniquely involve two new variables of an insured region: cross-subsidies and the economic growth rate. Another novelty is the development of the Black–Scholes model, considering the two new variables, and it is used to formulate the premium model. Following the modeling process, this study uses the model to estimate the premiums for natural disaster insurance in each province of Indonesia. The estimation results show that all new variables involved in the model novelties significantly affect the premiums. This research can be used by insurance companies to determine the premium of natural disaster insurance, which involves cross-subsidies and economic growth.

Suggested Citation

  • Titi Purwandari & Yuyun Hidayat & Sukono & Kalfin & Riza Andrian Ibrahim & Subiyanto, 2024. "Development of the Black–Scholes Model for Determining Insurance Premiums to Mitigate the Risk of Disaster Losses Using the Principles of Mutual Cooperation and Regional Economic Growth," Risks, MDPI, vol. 12(7), pages 1-21, July.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:7:p:110-:d:1428509
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    References listed on IDEAS

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    1. Jiayi Li & Zhiyan Cai & Yixuan Liu & Chengxiu Ling, 2022. "Extremal Analysis of Flooding Risk and Its Catastrophe Bond Pricing," Mathematics, MDPI, vol. 11(1), pages 1-14, December.
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