Optimizing public private risk transfer systems for flood risk management in the upper Tisza region

Abstract

This chapter summarizes studies on the development of a financial risk management model for floods in the Upper Tisza river region, Hungary. We focus on the evaluation of a multi-pillar flood loss-spreading program involving partial compensation to flood victims by the central government, the pooling of risks through a mandatory public-private insurance on the basis of location-specific exposures, and a contingent ex-ante credit to reinsure the pool’s liabilities. Policy analysis is guided by GIS-based catastrophe models and stochastic optimization methods with respect to location-specific risk exposures. We use economically sound risk indicators leading to convex stochastic optimization problems strongly connected with non-convex insolvency constraint and Conditional Value-at-Risk (CVaR).