Study On The Trigger Index Of Farmland Earthquake Index Insurance In Yunnan Province

In August 20, 2015, the earthquake index insurance of rural housing was officially launched. It effectively guarantee people’s life in the aftermath of the earthquake in Dali.. But it is uncertain whether setting the earthquake magnitude as index causes large basis risk, which causes the inconsistency of the payment and the actual loss in the amplitude of fluctuation? How to choose the trigger value and limit value to ensure continued operation of earthquake insurance? These require further research and analysis. Therefore, the research on the earthquake index insurance in Yunnan province is undoubtedly of great significance.Payment of earthquake index insurance is based on whether the parameter reaches trigger level, rather than based on the actual loss, so it has advantages of transparency of information and low cost. The earthquake index insurance is more suitable for the national policy insurance products. For the earthquake index insurance,the biggest problem which needs to be solve is the basis risk, which relates to the choice of trigger condition. In this paper, we choose the industry index as trigger condition, which has several advantages, compared with the pure parameter. First,there is high correlation between industry index and the actual loss. For example, the greater loss earthquake causes, the more money insurance industry should pay.Second, industry index is based on the loss of the whole industry rather than decided by individual, so the reliability is high. Third, industry index is issued by the government departments generally, so it is objective and transparent.This paper selects Zhao tong city of Yunnan province as the pilot areas, to design the earthquake index insurance product of rural housing which includes earthquake index, trigger condition and trigger value. We set the year earthquake index value( year total earthquake loss * earthquake payout ratio) and a set of trigger and limit values. In this case, insurer does not pay anything when the year earthquake index value is less than the trigger values. Insurer pays proportionally when the yearearthquake index value is greater than the trigger value and is less than the limit value.Insurer will no longer pay when the year earthquake index value is greater than the limit value. Afterwards we believe that the degree distribution of earthquake loss in Yunnan province follows the three parameter lognormal distribution and the frequency distribution of earthquake loss in Yunnan province follows Poisson distribution according to the fit of model. At the same time, we set different trigger values and limit values, and analyze ruin probability, according to the bankruptcy model. Finally we determine the trigger value is 500 and limit value is 4000.