Catastrophe risk management for sustainable development of regions under risks of natural disasters
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CATASTROPHE RISK MANAGEMENT FOR SUSTAINABLE DEVELOPMENT OF REGIONS UNDER RISKS OF NATURAL DISASTERS T. Yu. Ermolievaa and I. V. Sergienkob
UDC 519.21
The paper considers models and approaches to the analysis and decision making under catastrophic risks. It is shown that the design of optimal robust strategies for the flood risk management can be approached as a stochastic spatially explicit optimization problem combining the goals and constraints of various agents such as producers, farmers, individuals, governments, insurers, reinsurers, and investors. The approach is illustrated with a case study on catastrophic flood risks, which shows the importance of an appropriate combination of ex-ante and ex-post structural and financial measures. Keywords: catastrophe risk insurance, stochastic optimization, adaptive Monte Carlo method, probabilistic constraints, sustainable development. INTRODUCTION In the paper, we review the models and the approaches developed for the analysis and decision making on management under catastrophic risks. It is important to take into account the risk of catastrophes because of fast growing losses caused by natural disasters and man-caused catastrophes, which inevitably results in serious social, economic, and environmental problems. As leading insurance companies evaluated [7], direct losses from natural catastrophes have increased three-fold in the last three decades. The frequency and power of recent hurricanes, earthquakes, storms, wars, and disease outbreaks have revealed a tendency to escalating economic and human losses. The major factor promoting such growth is the lack of specific knowledge and neglect of risks. In particular, economic planning strategies often disregard the direct dependence of losses on land-use practice and on industry, people, and capital arrangement in catastrophe-prone areas. This indicates that the state policy is oriented mainly to the mitigation rather than prevention of natural disasters [23]. The necessity of saving public funds requires reappraising the preventive measures for mitigation and risk reduction. The expediency of protective measures should be justified in view of the economic and social factors. Solving a versatile challenge such as planning under natural risks requires a strict risk-specific methodology that would account for major factors influencing public safety and security of economic, land-use, and life-activity objects. It is also necessary to develop methods and mathematical models for quantitative assessment and prediction of risk management strategies under incomplete information. Traditional deterministic models do not consider a 500-year flood (repeating once every 500 years on the average) as an event that may affect the lives of the current and many subsequent generations. However, this event may occur today, next week, or next year. For example, the floods that took place in 2002 in Central Europe were evaluated as 100-, 250-, 500-, and 1000-year events. The most destructive catastrophe caused by a nuclear power plant acci
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