A Mutual Catastrophe Insurance Framework for Horizontal Collaboration in Prepositioning Strategic Reserves

• Published in: Operations research 2024-09, Vol.72 (5), p.2014-2041
• Main Authors: Zbib, Hani, Balcik, Burcu, Rancourt, Marie-Ève, Laporte, Gilbert
• Format: Article
• Language: English
• Subjects: Algorithms; Benders decomposition; Collaboration; Cooperation; Disasters; Emergency procedures; Emergency response; Extreme values; horizontal collaboration; Impact analysis; Insurance; Mathematical models; multistage stochastic program; mutual catastrophe insurance; Natural disasters; Policy Modeling and Public Sector OR; prepositioning; Probability; Reserves
• ISSN: 0030-364X; 1526-5463
• DOI: 10.1287/opre.2021.0141

Improving Disaster Preparedness Through Mutual Catastrophe Insurance In “A Mutual Catastrophe Insurance Framework for Horizontal Collaboration in Prepositioning Strategic Reserves,” H. Zbib, B. Balcik, M.-È. Rancourt, and G. Laporte present an innovative approach to collaborative disaster preparedness. The novel framework considers a risk-averse mutual insurer offering multiyear insurance contracts with coverage deductibles and limits to a portfolio of risk-averse policyholders. It is designed to foster horizontal collaboration among policyholders for joint disaster preparedness by effectively integrating operational and financial functions. The problem is modeled as a large-scale nonlinear multistage stochastic program and solved by using an effective Benders decomposition algorithm. The framework is validated with real data from 18 Caribbean countries focusing on hurricane preparedness. Given the predicted impacts of climate change, the proposed multiyear mutual catastrophe insurance framework promises to reshape global disaster preparedness and make a profound societal impact by providing a transparent disaster financing plan to protect vulnerable regions. The study’s findings stress the importance of long-term cooperation, prenegotiation of indemnification policies, and strategic setting of deductibles and limits by taking into account the correlation between policyholders. We develop a mutual catastrophe insurance framework for the prepositioning of strategic reserves to foster horizontal collaboration in preparedness against low-probability high-impact natural disasters. The framework consists of a risk-averse insurer pooling the risks of a portfolio of risk-averse policyholders. It encompasses the operational functions of planning the prepositioning network in preparedness for incoming insurance claims, in the form of units of strategic reserves, setting coverage deductibles and limits of policyholders, and providing insurance coverage to the claims in the emergency response phase. It also encompasses the financial functions of ensuring the insurer’s solvency by efficiently managing its capital and allocating yearly premiums among policyholders. We model the framework as a very large-scale nonlinear multistage stochastic program, and solve it through a Benders decomposition algorithm. We study the case of Caribbean countries establishing a horizontal collaboration for hurricane preparedness. Our results show that the collaboration is more effective