On the use of ensemble predictions for parametric typhoon insurance

Abstract

Parametric typhoon insurances are an increasingly used financial tool to mitigate the enormous impact of tropical cyclones, as they can quickly distribute much-needed resources, e.g., for post-disaster recovery. In order to optimise the reliability and efficiency of parametric insurance, it is essential to have well-defined trigger points for any post-disaster payout. This requires a robust localised hazard assessment for a given region. However, due to the rarity of severe, landfalling tropical cyclones, it is difficult to obtain a robust hazard assessment based on historical observations. A recent approach makes use of unrealised, high impact tropical cyclones from state-of-the-art ensemble prediction systems to build a physically consistent event set, which would be equivalent to about 10,000 years of observations. In this study, we demonstrate that (1) alternative trigger points of parametric typhoon insurance can be constructed from a local perspective and the added value of such trigger points can be analysed by comparing with an experimental set-up informed by current practice; (2) the estimation of the occurrence of tropical cyclone-related losses on the provincial level can be improved. We further discuss the potential future development of a general tropical cyclone compound parametric insurance.