Author(s)

Lidong Lin ¹, Jiahang Zhu ¹, Hengjia Xiong ¹

Affiliation(s)

¹ School of Mathematics and Statistics, Fujian Normal University, Fuzhou, 350000, China

Corresponding Author

Lidong Lin

ABSTRACT

In order to help insurance companies decide whether to cover areas with increasing extreme weather events, this paper selects 5 primary indicators and 15 secondary indicators, and constructs a natural risk assessment model based on entropy weight method (EWM), and applies it to China's Yangtze River Delta region and Ecuador. Through literature research, five main aspects affecting insurance assessment were identified: risk exposure, vulnerability, emergency response and recovery ability, and disaster loss, and 15 most representative secondary indicators were selected from 81 related indicators to build a model. Based on the entropy weight method, the weight of each index is determined by standardizing the original data, calculating information entropy and information redundancy, and an evaluation vector and an impact vector are formed to quantify the impact of different factors on the overall result. The risk assessment standard adopts the ALARP principle, divides the risk into unacceptable risk area, reasonable acceptable risk area and widely acceptable risk area, and combines the risk factor ρ to build a risk matrix to evaluate the positive and negative impacts of natural disasters. Two regions experiencing extreme weather events are selected for case analysis: the Yangtze River Delta and Ecuador. The ρ value of the Yangtze River Delta is 0.57, which is a reasonably acceptable risk area and suitable for insurance companies to cover, but it needs to accurately assess the risk and determine the premium pricing. With a ρ value of 0.93, Ecuador is an unacceptable risk zone and is not suitable for insurance companies due to its frequent occurrence of high-risk natural disasters, which may require higher premiums or may not provide full coverage.

KEYWORDS

Entropy Weight, Break-Even, Underwriting Risk

CITE THIS PAPER

Lidong Lin, Jiahang Zhu, Hengjia Xiong, Research on insurance underwriting risk based on entropy weight method and break-even analysis. Financial Engineering and Risk Management (2024) Vol. 7: 163-169. DOI: http://dx.doi.org/10.23977/ferm.2024.070421.

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