Risk assessment and financial management of natural disasters and crime



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The approach of compensating tornado-induced property losses in the United States contains two main strategies. First, private insurance companies cover the tornado damage costs claimed by their clients. Second, the government coverage programs distribute fundings in the case of state emergency for local governments. We intend to recover these risk assessment strategies by learning a statistical manifold on probability distributions of property losses reported in the national tornado database. Furthermore, we assess the property losses based on classification and prediction. As a result, we introduce a new scale to classify tornado events based on their financial impacts. Based on our predictions, the volume of tornado property losses would amount up to eight billion dollars by 2025.

The insurance policies should be modified to endure increasingly volatile catastrophic weather events. We propose a "Natural Disasters Index" based on the financial losses reported by the National Oceanic and Atmospheric Administration. This index is intended to forecast the degree of future risk that could forewarn the insurers and corporations allowing them to transfer insurance risk to capital market investors. Following the financial management principles used in this index, we propose a global index on economic impacts due to crimes in the United States using the financial losses reported by the Federal Bureau of Investigation. We provide the fair values for European call and put option prices and risk budgets for our portfolio. Our research findings are intended to help investors gauge investment risk in our portfolio based on their desired risk level and hedge strategies for potential losses due to economic crashes.



Tornado Damage Scales, Index Derivatives, Systemic Risk