Abstract
Flood insurance is an important financial measure for flood risk
management. However, a significant protection gap in flood insurance
exists in many countries due to high flood insurance costs. Reducing
flood insurance costs for both policyholders and insurance companies is
crucial for implementing flood insurance. In this study, we derive
fundamental mathematical principles for reducing overall insurance
costs, including premiums and risk reserves, by introducing the
geographic complementarity of flood risk based on portfolio theory. We
also propose a reasonable premium allocation framework among multiple
individual policyholders using cooperative game theory (CGT), which can
benefit all policyholders and achieve stable allocation. The proposed
approach is illustrated using China as a case study. The results show
that there are low correlation coefficients of flood losses across
different provinces and river basins in China, showing high geographic
risk complementarity. Compared to independent insurance in each
province, national flood insurance can reduce total premiums by 14.8%
and total risk reserves by 60.8%. The Yangtze River Basin shows the
greatest premium reduction by pooling its internal flood risk, compared
with independent insurance by provinces. The Yellow and Huai River Basin
shows the greatest premium reduction when pooling national flood risk,
compared with pooling risk within individual river basins. In summary,
geographic complementarity in flood risk has significant effects on
reducing flood insurance costs, implying that China can employ this
characteristic to implement a national flood insurance program.
Furthermore, the proposed approach can also offer new insights for
enhancing catastrophe insurance affordability in more countries.