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The Role of Financial Instruments in Integrated Catastrophic Flood Management

Multinational Finance Journal, 2003, vol. 7, no. 3 & 4, pp. 207-230
Yuri Ermoliev , International Institute for Applied Systems Analysis, Austria
Guenther Fischer , International Institute for Applied Systems Analysis, Austria
Istvan Galambos , VITUKI Consult, Hungary

Abstract:
The main goal of this paper is to develop a flood management model that takes into account the specifics of catastrophic risk management: highly mutually dependent losses, the lack of information, the need for long-term perspectives and explicit analyses of spatial and temporal heterogeneities of various agents such as individuals, governments, and insurers. We use modified data from a pilot region of the Upper Tisza river, Hungary, to illustrate the evaluation of a public multipillar flood loss-spreading program involving partial compensation to flood victims by the central government, the pooling of risks through a mandatory public catastrophe insurance on the basis of location-specific exposures, and the demand for a contingent ex-ante credit to reinsure the insurance’s liabilities. GIS-based catastrophe models and stochastic optimization methods are used to guide policy analysis with respect to location-specific risk exposures.

Keywords : flood risk; catastrophe modeling; insurance; stochastic optimization; insolvency; contingent credit,; CvaR
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