A Systems Approach to Modeling Catastrophic Risk and Insurability

This paper describes a spatial-dynamic, stochastic optimization model that takes account of the complexities and dependencies of catastrophic risks. Following a description of the general model, the paper briefly discusses a case study of earthquake risk in the Irkutsk region of Russia. For this purpose the risk management model is customized to explicitly incorporate the geological characteristics of the region, as well as the seismic hazards and the vulnerability of the built environment. In its general form, the model can analyze the interplay between investment in mitigation and risk-sharing measures. In the application described in this paper, the model generates insurance strategies that are less vulnerable to insolvency.