Insurability of Catastrophic Risks: The Stochastic Optimization Model
Authors: Ermoliev YM, Ermolieva TY, MacDonald GJ, Norkin VI
Publication Year: 2000
Reference: Optimization, 47:251-265 [2000]
Abstract
Catastrophes produce losses highly correlated in space and time, which break the law of large numbers. We derive the insurability of dependent catastrophic risks by calculating conditions that would aid insurers in deliberate selection of their portfolios. This paper outlines the general structure of a basic stochastic optimization model. Connections between the probability of ruin and non-smooth risk functions, as well as adaptive Monte Carlo optimization procedures and path dependent laws of large numbers, are discussed.