A proposed approach towards minimizing basis risk in tsunami parametric insurance scheme

This study serves as a starting point for the systematic quantification and minimization of basis risk in tsunami parametric insurance, by evaluating risk indicators of both negative and positive basis risk. This study introduces the first comprehensive optimization framework that considers the three key payment conditions: threshold, index and payout.

Using tsunami inundation depth as the index for payment can significantly reduce basis risk. Furthermore, incorporating multiple indices improves payout accuracy and reduces basis risk, highlighting the potential of this approach in developing more robust tsunami parametric insurance products.