Paper: arXiv 2507.18240

Authors: Olivier Lopez, Daniel Nkameni

Abstract

Index insurance is often proposed to reduce protection gaps, especially for emerging risks. Unlike traditional insurance, it bases compensation on a measurable index, enabling faster payouts and lower claim management costs. This approach benefits both policyholders, through quick payments, and insurers, through reduced costs and better risk control due to reliable data and robust statistical estimates. An important difference with the concept of Cat Bonds is that the feasibility of such coverage relies on the possibility of mutualization. Mutualization, in turn, is achieved only if a sufficiently high number of policyholders agree to subscribe. The purpose of this paper is to introduce a model for the demand for index insurance and to provide conditions under which the solvency of the portfolio is achieved. From these conditions, we deduce a product that combines index and traditional indemnity insurance in order to benefit from the best of both approaches. We illustrate our results with a practical example involving the design of an index insurance product in the field of cyber insurance.

Complexity vs Empirical Score

  • Math Complexity: 6.5/10
  • Empirical Rigor: 4.5/10
  • Quadrant: Lab Rats — theoretically deep, empirically untested

Why this score: The paper provides a formal expected-utility model combining demand and solvency constraints for index insurance, leading to a novel hybrid contract design. While mathematically sound and clearly written, the work relies primarily on theoretical modeling with illustrative practical applications rather than exhaustive empirical backtesting or shared datasets.

Research Flowchart

  flowchart TD
    A["Research Goal:<br>Design viable index insurance under demand & solvency constraints"] --> B["Data Inputs:<br>Cyber risk statistics, index reliability, & subscriber demand data"]
    B --> C["Methodology:<br>Model demand & define portfolio mutualization conditions"]
    C --> D["Solvency & Risk Analysis:<br>Evaluate payout speed, claim costs, & portfolio solvency"]
    D --> E["Product Hybridization:<br>Combine index & traditional indemnity insurance"]
    E --> F["Key Outcome:<br>Optimized hybrid cyber insurance product balancing speed & solvency"]