Ruin Probability on Storm and Flood Disaster Risk Finance in Multiple Railway Businesses

Abstract

Given that the losses incurred from natural disasters are uncertain and characterized by considerable fluctuation, restoration funds intended for disaster preparation are usually calculated based on the assumption of probable maximum loss (PML). However, preparing for PML via the acquisition of sufficient funding is difficult for railway companies that suffer from financial difficulties. These companies urgently need to implement risk financing (RF) strategies against frequent storm and flood disasters to avoid insolvency. Meanwhile, there is also a great need for an analysis of storm and flood disaster RF with targeting multiple railway businesses for reasons of group insurance or consolidated accounting. To address these issues, this study develop a financial risk model that considers the disaster-related characteristics and financial conditions of multiple railway businesses and establish a ruin probability model for the mathematical analysis of the procurement of funds, including initial reserves, insurance money, and subsidy. These models are designed to help multiple railway businesses prepare for losses estimated on the grounds of data on past damages. Case studies that feature actual data on railway companies across Japan are conducted to demonstrate and verify the effectiveness of the proposed models.