Convenient approximation techniques for storm and flood disaster risk finance in the railway business

Abstract

The storm and flood disasters account for 90% of the disasters that have led to the abolishment of railways in Japan. Such disasters are an overwhelming risk factor for many railway businesses in this country. Because the numbers of storm and flooding disasters have increased and intensified globally due to climate change, the importance of storm and flooding disaster risk financing (RF) has increased in many railway businesses. In this context, based on the Cramér-Lundberg model of disaster characteristics and financial conditions, this study proposes convenient approximation techniques to determine ruin probability and additional procurable funds, which are vital in storm and flooding disaster RF. Specifically, we present six theoretical approximation formulas of ruin probability and additional procurable funds, which meet the technical requirements (i.e., conservativeness, approximation accuracies, and domain) for practical work in RF. The technical requirements of these theoretical approximation formulas are evaluated using actual data collected in railway companies across Japan. The convenient usage of these formulas is also evaluated.