Assessing the dependence between extreme rainfall and extreme insurance claims: A bivariate peak over threshold method

Climate change has increased the frequency and intensity of extreme weather events. For insurance companies, it is essential to identify and quantify extreme climate risk. They must set aside enough capital reserve to bear the costs of extreme events, otherwise, they can be put in a danger of facing bankruptcy. In this article, I employ the state-of-the-art bivariate peak over threshold method to study the dependence between extreme rain events and extreme insurance claims. I utilize a novel insurance data set on home insurance claims related to rainfall-induced damage in Norway and select two large Norwegian municipalities to investigate the impact of heavy rain on large claim numbers. Based on the model estimates and tail dependence measures, I find evidence that extremely high numbers of insurance claims have the strongest dependence with rainfall intensity and daily rain amounts. I also identify the region-specific difference in rainfall variables as a key indicator of home insurance risk. The findings offer insights into the complex dynamics between extreme rainfall and extreme claim numbers in home insurance. Contributing to the long-term sustainability of the insurance industry, the proposed method facilitates the development of tailor-made pricing models and robust capital reserve management in the face of changing climate.