Risk Modeling for Appraising Named Peril Index Insurance Products

315 Pages·2017·9.69 MB·English

R
is
k
M
o
d
e
lin
g
fo
r
A
p
p
r
a
is
in
g
N
a
m
e
d
P
e
r
il In
d
e
x
In
s
u
r
a
n
c
e
P
r
o
d
u
c
ts DIRECTIONS IN DEVELOPMENT
Agriculture and Rural Development
M
a
p Risk Modeling for
fu
m
o
, G Appraising Named Peril
r
o
e
n
e
n
d Index Insurance Products
a
a
l, a
n
d
D A Guide for Practitioners
u
g
g
e
r
Shadreck Mapfumo, Huybert Groenendaal, and Chloe Dugger

Risk Modeling for
Appraising Named Peril
Index Insurance Products

Directions in Development
Agriculture and Rural Development
Risk Modeling for
Appraising Named Peril
Index Insurance Products
A Guide for Practitioners
Shadreck Mapfumo, Huybert Groenendaal, and Chloe Dugger
© 2017 International Bank for Reconstruction and Development / The World Bank
1818 H Street NW, Washington, DC 20433
Telephone: [phone]; Internet: www.worldbank.org
Some rights reserved
1 2 3 4 20 19 18 17
This work is a product of the staff of The World Bank with external contributions. The findings, interpreta-
tions, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its
Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the
accuracy of the data included in this work. The boundaries, colors, denominations, and other information
shown on any map in this work do not imply any judgment on the part of The World Bank concerning the
legal status of any territory or the endorsement or acceptance of such boundaries.
Nothing herein shall constitute or be considered to be a limitation upon or waiver of the privileges and
immunities of The World Bank, all of which are specifically reserved.
Rights and Permissions
This work is available under the Creative Commons Attribution 3.0 IGO license (CC BY 3.0 IGO) http://
creativecommons.org/licenses/by/3.0/igo. Under the Creative Commons Attribution license, you are free to
copy, distribute, transmit, and adapt this work, including for commercial purposes, under the following
conditions:
Attribution—Please cite the work as follows: Mapfumo, Shadreck, Huybert Groenendaal, and Chloe Dugger.
2017. Risk Modeling for Appraising Named Peril Index Insurance Products: A Guide for Practitioners.
Directions in Development. Washington, DC: World Bank. doi:10.1596/978-1-4648-1048-0. License:
Creative Commons Attribution CC BY 3.0 IGO
Translations—If you create a translation of this work, please add the following disclaimer along with the
attribution: This translation was not created by The World Bank and should not be considered an official
World Bank translation. The World Bank shall not be liable for any content or error in this translation.
Adaptations—If you create an adaptation of this work, please add the following disclaimer along with the
attribution: This is an adaptation of an original work by The World Bank. Views and opinions expressed in
the adaptation are the sole responsibility of the author or authors of the adaptation and are not endorsed by
The World Bank.
Third-party content—The World Bank does not necessarily own each component of the content
contained within the work. The World Bank therefore does not warrant that the use of any third-
party–owned individual component or part contained in the work will not infringe on the rights of
those third parties. The risk of claims resulting from such infringement rests solely with you. If you
wish to reuse a component of the work, it is your responsibility to determine whether permission is
needed for that reuse and to obtain permission from the copyright owner. Examples of components
can include, but are not limited to, tables, figures, or images.
All queries on rights and licenses should be addressed to World Bank Publications, The World Bank Group,
1818 H Street NW, Washington, DC 20433, USA; e-mail: [email protected].
ISBN (paper): 978-1-4648-1048-0
ISBN (electronic): 978-1-4648-1049-7
DOI: 10.1596/978-1-4648-1048-0
Cover photo: Adzope, a village in the eastern part of Côte d’Ivoire. © Ami Vitale / World Bank. Further
permission required for reuse.
Cover design: Debra Naylor, Naylor Design, Inc.
Library of Congress Cataloging-in-Publication Data has been requested.
Risk Modeling for Appraising Named Peril Index Insurance Products
http://dx.doi.org/10.1596/978-1-4648-1048-0
Contents
Foreword xvii
Acknowledgments xix
About the Authors xxi
Endorsements xxiii
Abbreviations xxv
Chapter 1 Introduction 1
1.1 Guide Overview 3
1.2 The Case Example 4
Bibliography 5
Chapter 2 Critical Concepts in Named Peril Index Insurance 7
2.1 Why Is Insurance Useful for Smallholder Farmers? 7
2.2 What Is Named Peril Index Insurance? 9
2.3 Who Are the Main Stakeholders in the Risk Transfer
Process? 11
2.4 How Are Named Peril Index Insurance Products
Developed? 15
Note 18
Bibliography 18
pArt 1 Decision tools for insurance managers 19
Chapter 3 Prefeasibility Study 21
3.1 Introduction 21
3.2 Outline of Emerging Managerial and Process Controls 22
Note 28
Bibliography 28
Chapter 4 Product Design and Evaluation—The Base Index 29
4.1 Introduction 29
4.2 Basis Risk and the Implied Deductible 30
4.3 Steps in Product Design and Evaluation 34
Bibliography 47
Risk Modeling for Appraising Named Peril Index Insurance Products   v
http://dx.doi.org/10.1596/978-1-4648-1048-0
vi Contents
Chapter 5 Product Pricing—The Base Index 49
5.1 Introduction 49
5.2 Outline of Emerging Managerial and Process Controls 50
Bibliography 63
Chapter 6 Product Evaluation—The Redesigned Index 65
6.1 Introduction 65
6.2 Outline of Emerging Managerial and Process Controls 68
6.3 Step 1: Determine Key Model Inputs and Assumptions 68
6.4 Step 2: Evaluate Key Managerial Decision Metrics 70
6.5 Step 3: Document and Communicate the Product
Options and Business Decision 72
Bibliography 73
Chapter 7 Detailed Market Analysis 75
7.1 Introduction 75
7.2 Outline of Emerging Managerial and Process Controls 76
Note 82
Bibliography 82
Chapter 8 Value of Index Insurance to a Financier 83
8.1 Introduction 83
8.2 Outline of Emerging Managerial and Process Controls 85
Part 1 Conclusion 90
Notes 90
Bibliography 91
pArt 2 probabilistic modeling for insurance Analysts 93
Chapter 9 How to Use Part 2 95
9.1 Introduction 95
9.2 Website 96
9.3 Overview of Key Assumptions and Limitations of
This Guide’s Models 96
9.4 Monte Carlo Software Tools 97
Note 98
Bibliography 98
Chapter 10 Fundamentals of Probabilistic Modeling 99
10.1 The Case for Probabilistic Modeling in
Index Insurance 100
10.2 Key Building Blocks for Probabilistic Modeling 107
10.3 Key Outputs for Probabilistic Modeling 130
Risk Modeling for Appraising Named Peril Index Insurance Products
http://dx.doi.org/10.1596/978-1-4648-1048-0
Contents vii
10.4 A Reminder on How to Use the Models in
This Guide 134
Notes 135
Bibliography 137
Chapter 11 Evaluating the Base Index 139
11.1 Background and Objectives 139
11.2 Model Inputs 140
11.3 Model Computations 145
11.4 Model Outputs 165
11.5 Alternative Modeling Approach:
Retrospective Analysis 167
Bibliography 170
Chapter 12 Pricing the Base Index 171
12.1 Background and Objectives 171
12.2 Model Inputs 171
12.3 Model Computations 175
12.4 Model Outputs 208
Note 209
Bibliography 210
Chapter 13 Evaluating the Redesigned Index 211
13.1 Background and Objectives 211
13.2 Model Inputs 212
13.3 Model Computations 216
13.4 Model Outputs 228
13.5 Alternative Modeling Approach:
Retrospective Analysis 229
Bibliography 229
Chapter 14 Detailed Market Analysis 231
14.1 Background and Objectives 231
14.2 Model Inputs 231
14.3 Model Computations 235
14.4 Model Outputs 247
Bibliography 248
Chapter 15 Value of Index Insurance 251
15.1 Background and Objectives 251
15.2 Model Inputs 252
15.3 Model Computations 254
15.4 Model Outputs 263
Bibliography 264
Risk Modeling for Appraising Named Peril Index Insurance Products
http://dx.doi.org/10.1596/978-1-4648-1048-0
viii Contents
Chapter 16 Alternative Probabilistic Modeling Approaches 267
16.1 Overview of Alternative Approaches 267
16.2 Approach 1: Simulating the Payouts Directly 268
16.3 Approach 2: Simulating the Index 270
16.4 Approach 3: Simulating the Weather 271
16.5 Which Model to Use? 271
Notes 272
Bibliography 272
Chapter 17 Conclusion 273
Glossary 275
Boxes
1.1 Promoting High Standards of Professional Behavior 3
3.1 Changes in Risk Conditions over Time 23
10.1 A Brief History of Monte Carlo Simulation 105
10.2 When to Use Monte Carlo Simulation 106
11.1 Overview of Calculations for the Base Index Product
Evaluation Metrics 166
12.1 Summary of Key Formulas Used in the Chapter 198
12.2 Overview of Calculations for the Equitable Premiums Metrics 207
13.1 Overview of Calculations for the Redesigned Index Product
Evaluation Metrics 228
14.1 Overview of Calculations for the Detailed Market Analysis
Metrics 247
15.1 Overview of Calculations for the Value of Index
Insurance Metrics 263
case example Boxes
1CB.1 Excellence Insurance Background 5
2CB.1 Smallholder Agriculture and Household Finance in Mapfumoland 8
2CB.2 Insured Units and Proxies for Mass Bank Product 10
2CB.3 Excellence Insurance Staffing and Resources 15
2CB.4 Base Index and Redesigned Index Triggers 16
2CB.5 Specific Years Comparison for Base Index and Redesigned Index 17
3CB.1 Excellence Insurance’s Prefeasibility Study for Mapfumoland 22
3CB.2 Summary of Key Points from the Research Plus Prefeasibility
Study on the Mapfumoland Market 25
3CB.3 Excellence Insurance Technical Evaluation of Prefeasibility Study 27
4CB.1 Overview of the Base Index for Mass Bank 30
4CB.2 Categorical Classification of Past Damages for Areas
A to J, 1984–2013 35
4CB.3 Subject Specialist Information for Base Index Product Design 36
Risk Modeling for Appraising Named Peril Index Insurance Products
http://dx.doi.org/10.1596/978-1-4648-1048-0