Planning & Management
394329 - Addressing theoretical shortcomings in the design of risk pooling strategies to mitigate drought-related financial losses for water utilities
Tuesday, June 5
8:30 AM - 10:00 AM
Location: Greenway GH
Department of Environmental Sciences and Engineering and Center on Financial Risk in Environmental Systems, Gillings School of Global Public Health and UNC Institute for the Environment, University of North Carolina at Chapel Hill
Gregory Characklis, Chapel Hill, NC – Department of Environmental Sciences and Engineering and Center on Financial Risk in Environmental Systems, Gillings School of Global Public Health and UNC Institute for the Environment, University of North Carolina at Chapel Hill
Financial insurance has been identified as an effective tool for managing drought-related financial risks for water utilities, and pooling these risks (with generalized contracts) has been shown to offer the potential for reducing the costs of insurance relative to risk shifting (with individualized contracts). Nonetheless, an actual risk pool will be composed of water utilities with a range of different risk exposures, thereby varying significantly from the assumptions in classical pooling theory which hold that these risks are independent and identically distributed. This departure from theory presents challenges in terms of understanding the incremental risk that each member contributes to the pool, as well as how each contributor’s coverage should be fairly priced. This work examines the impacts of developing index-insurance strategies that recognize the shortcomings of pooling theory by evaluating risks that are distributed across all 344 climate divisions of the contiguous United States. Financial contracts are based on the Palmer Hydrologic Drought Index and account for both spatial and temporal autocorrelation. Results describe how the costs of mitigating drought-related financial risks can be equitably distributed amongst the members of a risk pool in order to encourage higher participation and effective risk management.