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We develop a model for contagion in reinsurance networks by which primary insurers’ losses are spread through the network. Our model handles general reinsurance contracts, such as typical excess of loss contracts. We show that simpler models existing in the literature—namely proportional reinsurance—greatly underestimate contagion risk. We characterize the fixed points of our model and develop efficient algorithms to compute contagion with guarantees on convergence and speed under conditions on network structure. We characterize exotic cases of problematic graph structure and nonlinearities, which cause network effects to dominate the overall payments in the system. Last, we apply our model to data on real-world reinsurance networks. Our simulations demonstrate the following. (1) Reinsurance networks face extreme sensitivity to parameters. A firm can be wildly uncertain about its losses even under small network uncertainty. (2) Our sensitivity results reveal a new incentive for firms to cooperate to prevent fraud, because even small cases of fraud can have outsized effect on the losses across the network. (3) Nonlinearities from excess of loss contracts obfuscate risks and can cause excess costs in a real-world system. This paper was accepted by Baris Ata, stochastic models and simulation.
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Network Models and Simulation Analytics for Multi-scale Dynamics of Biological Invasions
Globalization and climate change facilitate the spread and establishment of invasive species throughout the world via multiple pathways. These spread mechanisms can be effectively represented as diffusion processes on multi-scale, spatial networks. Such network-based modeling and simulation approaches are being increasingly applied in this domain. However, these works tend to be largely domain-specific, lacking any graph theoretic formalisms, and do not take advantage of more recent developments in network science. This work is aimed toward filling some of these gaps. We develop a generic multi-scale spatial network framework that is applicable to a wide range of models developed in the literature on biological invasions. A key question we address is the following: how do individual pathways and their combinations influence the rate and pattern of spread? The analytical complexity arises more from the multi-scale nature and complex functional components of the networks rather than from the sizes of the networks. We present theoretical bounds on the spectral radius and the diameter of multi-scale networks. These two structural graph parameters have established connections to diffusion processes. Specifically, we study how network properties, such as spectral radius and diameter are influenced by model parameters. Further, we analyze a multi-pathway diffusion model from the literature by conducting simulations on synthetic and real-world networks and then use regression tree analysis to identify the important network and diffusion model parameters that influence the dynamics.
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- PAR ID:
- 10376925
- Date Published:
- Journal Name:
- Frontiers in Big Data
- Volume:
- 5
- ISSN:
- 2624-909X
- Format(s):
- Medium: X
- Sponsoring Org:
- National Science Foundation
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- Free Publicly Accessible Full Text
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Accepted Manuscript1.0
- Journal Article:
- https://doi.org/10.3389/fdata.2022.796897
