B0770
Title: Parametric insurance for extreme risks: The challenge of properly covering severe claims
Authors: Maud Thomas - Sorbonne University (France) [presenting]
Abstract: Parametric insurance has emerged as a practical way to cover risks that may be difficult to assess. By introducing a parameter that triggers compensation and allows the insurer to determine a payment without estimating the actual loss, these products simplify the compensation process and provide easily traceable indicators to perform risk management. On the other hand, this parameter may sometimes deviate from its intended purpose and may not always accurately represent the basic risk. Theoretical results are provided that investigate the behaviour of parametric insurance products when faced with large claims. In particular, these results measure the difference between the actual loss and the parameter in a generic situation, with a particular focus on heavy-tailed losses. These results may help to anticipate, in the presence of heavy-tail phenomena, how parametric products should be supplemented by additional compensation mechanisms in case of large claims. Simulation studies that complement the analysis show the importance of nonlinear dependence measures in providing good protection over the whole distribution.
