A Better Trigger: Indices for Insurance

Tse-Ling Teh, Chris Woolnough

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

Index triggers have enabled the extension of insurance to a wide range of risks, by providing a simple mechanism to determine payment. However, the resulting coverage generates basis risk, the variability over time in the level of insurance payouts relative to the level of losses. We analyze basis risk to rank binary and multivalue indices for any risk-averse individual. Our ranking provides methods to select an index that is optimal for a heterogeneous group and illustrates that higher correlation between loss and index, does not necessarily equate to a better index.

Original languageEnglish
Pages (from-to)861-885
Number of pages25
JournalJournal of Risk and Insurance
Volume86
Issue number4
Early online date28 Feb 2018
DOIs
Publication statusPublished - Dec 2019

Keywords

  • BASIS RISK
  • EXPECTED UTILITY
  • EFFICIENCY

Cite this

Teh, Tse-Ling ; Woolnough, Chris. / A Better Trigger: Indices for Insurance. In: Journal of Risk and Insurance. 2019 ; Vol. 86, No. 4. pp. 861-885.
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A Better Trigger: Indices for Insurance. / Teh, Tse-Ling; Woolnough, Chris.

In: Journal of Risk and Insurance, Vol. 86, No. 4, 12.2019, p. 861-885.

Research output: Contribution to journalArticleAcademicpeer-review

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