THE DETERMINATION OF OPTIMAL RETENTION FOR EXCESS OF LOSS REINSURANCE SCHEME (CASE STUDY: EARTHQUAKE REINSURANCE IN WEST JAVA PROVINCE)
Indonesia is an archipelago located at the meeting point of four major tectonic plates: the Indo-Australian, the Eurasian, the Pacific, and the Philippine Sea Plates. This positioning resulting in Indonesia to be highly susceptible to tectonic earthquakes. For example, the presence of the Indo-Au...
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| Format: | Final Project |
| Language: | Indonesia |
| Online Access: | https://digilib.itb.ac.id/gdl/view/84136 |
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| Institution: | Institut Teknologi Bandung |
| Language: | Indonesia |
| Summary: | Indonesia is an archipelago located at the meeting point of four major tectonic
plates: the Indo-Australian, the Eurasian, the Pacific, and the Philippine Sea Plates.
This positioning resulting in Indonesia to be highly susceptible to tectonic earthquakes.
For example, the presence of the Indo-Australian tectonic plate to the south
of West Java province makes the region particularly vulnerable to tectonic earthquake
disasters. Earthquakes could cause many losses of lives as well as damages
to properties. According to the Fiscal Policy Agency of the Indonesia Ministry of
Finance, the average financial losses due to earthquakes in Indonesia, amounts to
IDR 7.56 trillion per year. Therefore, a financial instrument to mitigate the financial
losses due to earthquake disasters is essential; one such instrument is an earthquake
insurance/reinsurance. This Final Project (Tugas Akhir) briefly discusses
the Earthquake Catastrophe (CAT) Model, which consists of four modules: Hazard,
Inventory, Vulnerability, and Loss Modules. It also explores the Excess-of-Loss
Reinsurance scheme and the determination of an optimal retention by minimizing
the Value-at-Risk of the insurance company’s Total Cost. The data used as a
case study is the Average Annual Loss (AAL) data from seven “Kota/Kabupaten”
(Districts) in West Java Province: Kabupaten Sukabumi, Kabupaten Bogor,
Kabupaten Bandung, Kabupaten Cianjur, Kabupaten Tasikmalaya, Kota Bandung,
and KabupatenWest Bandung. Several scenarios for determining optimal retentions
are conducted based on four assumed probability distributions for the Aggregate
Financial Losses: Lognormal, Gamma, Inverse Gaussian, and Pareto; various
values of the Coefficient of Variation (CV); and several loading factor values for
the reinsurance risk premiums. The reinsurance risk premium is determined using
the Expected Value Premium Principle. |
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