ESTIMATION OF EARTHQUAKE INSURANCE PREMIUM RATES: TURKISH CATASTROPHE INSURANCE POOL CASE

Abstract

Earthquakes are the natural catastrophes which have the high estunpredictability; destructive earthquakes appear less frequently in time andspace. However, the financial impact of such earthquakes on human lives andeconomies is disastrous. The prediction on the occurrence of an earthquakein time, magnitude and location is expressed in terms of their joint probabilities. The estimation on the economic losses mainly depend on the propertiesof the structure. The variability in these variables makes it di¢ cult to collect enough historical information for a precise loss estimation and, hence, fordetermining a realistic insurance premium. This paper questions how muchload should be added to the earthquake insurance premiums which incorporatethe in*uence of the factors being ignored due to the loss of the information.Bayesian regression emphasizing the information needed in optimal premiumvaluation conditional to the parameter estimates, is employed. The implementation of the proposed method is done for the parameter estimation inTurkish Catastrophe Insurance Pool premiums which aims to yield a limited earthquake coverage in a compulsory insurance scheme