Alfred Chong (Heriot Watt University)

Title: Pareto-efficient risk sharing in centralized insurance markets with application to flood risk

Abstract: Centralized insurance can be found in both the private and public sectors. This talk provides a microeconomic study of the risk-sharing mechanisms in these markets, where multiple policyholders interact with a centralized monopolistic insurer. With minimal assumptions on the risk preferences of the market participants, we characterize Pareto optimality in terms of the agents' risk positions and their assessment of the likelihoods associated with their loss tail events. We relate Pareto efficiency in this market to a naturally associated cooperative game. Based on our theoretical results, we then consider a model of flood insurance coverage via an illustrative example. The lessons drawn from our theoretical results and this example lead to important policy implications for the existing National Flood Insurance Program in the United States.

Rare events occur in many different applications including finance, nuclear engineering and health care. Efficiently simulating these scenarios and accurately estimating the probability of such events occurring is challenging, yet crucial for prediction, uncertainty quantification, safety and regulation. Since exact solutions are rarely available and standard Monte Carlo techniques are usually inefficient, it is necessary to develop clever, more advanced techniques to simulate rare events well.

This workshop will look at some of these techniques and various applications where rare event sampling is pertinent.