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TUE7.1: Risk financing and sharing
Time-varying beta risk of Turkish industry portfolios: a comparison of GARCH and Kalman filter modelling techniques
University of Glasgow, United Kingdom
This project investigates the performance of GARCH and Kalman filter techniques for modelling the weekly time-varying behaviour of systematic risk for 19 Turkish industries in the capital asset pricing model (CAPM). GARCH models with different conditional distributions, Kalman filter based models and the standard constant coefficient model are applied to estimate and forecast the time-varying betas in the CAPM: GARCH-normal, GARCH-t, GJRGARCH-normal, GJRGARCH-t, Kalman filter random walk (KFRW), Kalman filter mean reverting (KFMR), OLS models. These approaches are applied to weekly excess returns data for 19 different industry portfolios in Turkey over the period 1 August 2002 to 16 February 2012. Forecasts errors are employed to evaluate both the in-sample forecasting and out-of-sample forecasting performance of all the methods. In addition to this, 1-year weekly beta and return are forecast using a 5-year sample within a rolling window forecast with one week ahead in the out-of-sample forecasting procedure. The model evaluation criteria based on forecasting errors overwhelmingly support the Kalman filter approach for in-sample and out-of-sample forecasting procedure, with the mean-reverting approach (KFMR) generally outperforming the random walk (KFRW).
Insurance literacy for micro insurance awareness
CARE, India, Republic of
CARE is an international development aid organization working with poor communities across the world. CARE introduced micro insurance services in 2006 as part of long range risk reduction strategy in coastal districts of Tamil Nadu affected by 2004 Tsunami in collaboration with private insurance providers. Poor penetration of insurance services often is attributed to lack of understanding on risks perceived, insurance services and inability to differentiate from other financial services particularly savings. More over the traditional delivery agents have limited understanding on claim conditions, what qualifies for claim, when to seek a claim and where to submit documents. Considering these challenges, CARE modelled a participatory four-phase client education strategy, (1) risk education, helps the users understand what is risk and how they remain vulnerable in the absence of adequate risk mitigation tools (2) Insurance education familiarises the users on principles and practices of insurance which deepens users’ understanding on how insurance schemes are managed, what qualifies for claims and when claims were admissible (3) Product education, deals with risk cover, claims conditions, enrolment criteria and exclusions (4) process education explains enrolment process, claim seeking process and document requirements for claim settlement. Increased understanding and familiarity over claim conditions resulted in distribution of over 345,000 polices. It was observed that over 40% of the clients were retained in subsequent years. A joint review process was established where both insurance provider and intermediaries came together and reflected on their performance and efficiencies. The intermediaries were trained on claim process and conditions; the increased understanding and capacity at intermediary level enabled them screen the claims at community level which lowered claim rejection besides preventing frauds. For promotion and development of insurance market amongst low income communities an un-front investment in the form of grant would make a difference.
Insurance cover for natural disasters
CARE India, India, Republic of
Risk needs of low income communities are distinctively different from other economically better off groups; cover against natural disasters is the most desired risk need than any other risks. In a world of ever increasing episodes of natural disasters, only large scale calamities are reported and responded, calamities which affects the properties of low income households are often considered as usual and insignificant, as the value of the damages are small individually; however for poor households the small is really big enough and miserably devastating! Poor households are more likely to be affected even if there is a small deviation in the distribution of rains.
What do disasters teach us about economics?
Middlesex University, United Kingdom
There is continuing interest in applying economic concepts to disaster risk management. This interest is focused upon three aspects: (i) Economy; how do the shocks of disasters propagate through an economic system and what consequently is the best means of promoting recovery from such a shock? (ii) Decisions; how to make a better choice, what is the best point in the risk cycle to intervene, and how there to intervene.(iii) The use of economic instruments such as prices, insurance, tradable instruments, to change the behaviour of individuals or organisations, as the means of intervening as opposed to directly changing the environment.
Introducing auditing of elements and measures of natural crisis management processes as an efficient tool for developing corrective actions
1Kuritkara Consulting Engineers Co.; 2Transportation Research Institute of Road and Urban Development Ministry
The increasing rate of natural crisis due to outbreak of natural events from one side and tremendous investments made on risk mitigation measures on recent decades reveal the uncertainty and ineffectiveness of implemented measures for risk mitigation in lots of case projects. Making an analytical look at the past processes results in short term benefits of various implemented measures instead of their long term reasonability and effectiveness. Auditing techniques of risk mitigation measures has been taken into practice for man-made and technological incidents while there has not developed any concept in this respect for auditing elements of natural management management processes including PPRR. An influential point which may be incorporated in neglecting this concept from natural events and risk management scope, addresses the causes of natural hazards which are out of impact of human and also the complexity of them. While, this fact may be true with respect to unavoidability of happening natural events, human related effects that lead to intensifying the impacts of natural events is still negotiable. Moreover, auditing the implemented measures associated with any phases and elements of natural crisis management cycle would be of essential in reviewing and controlling actions and practices and finally proposing corrective actions. In this paper, there would be demonstrated a proposed method and a practical framework of auditing the natural risk management criteria based on the documentation structure gained from a research project which was defined in Iranian Ministry of Road and Urban development captioned as flood event documentation. Finally there would be presented a number of predictable outcomes of auditing based on achieved experiences.
Proposal for a national earthquake insurance program for Greece
1University of Piraeus, Greece, Hellenic Republic; 2University of Piraeus, Greece, Hellenic Republic
It is proposed that Greece undertakes the establishment of a national earthquake insurance program for homeowners that will replace the ex-post disaster relief by the State when an earthquake occurs. Greece is seismically the most active region in the whole Mediterranean. By employing four different catastrophe models, it has been estimated that the economic loss to the residential stock of a 1-in-200 year event is likely to be greater than 22 billion Euros; for a 1-in-100 year event is about 14 billion Euros; for an 1-in-25 year event is 5 billion Euros; and for a 1-in-5 year event is 1.3 billion Euros. This potential loss severity exposes the inherent limitations of the ex-post funding approach to natural disasters adopted by successive Greek governments and underscores the urgent need for establishing a National Earthquake Insurance Program. It is proposed that the earthquake coverage should be compulsory and the management of the insurance program be based on the principle of a public-private partnership. The objective of the program would be to provide affordable earthquake insurance, up to a maximum amount, to all homeowners, on the basis of risk-based premiums. A comprehensive and unique data bank of the residential stock in the country has been developed, which will be very useful to the local insurance industry as well as to reinsurers.