Professor Qihe Tang

We live in a rapidly changing, wicked world full of shock risk and complexity, which drive the degree of unpredictability. Climate change introduces many more complexity layers, and so does the ongoing COVID-19 pandemic. The insurance industry is significantly affected by this changing environment, but insurance can also play a proactive role in providing sustainable solutions. The UN Environment Programme Finance Initiative has launched Principles for Sustainable Insurance. Actuaries are in an ideal position, in collaboration with insurance partners, to develop actuarial solutions to newly emerging threats in this changing environment.

My expertise centers on extreme value theory for insurance, finance, and quantitative risk management. With motivations outlined above, I have been working on various topics from the interdisciplinary field of insurance, finance, probability, and operations research. These topics include:

(1) Modeling, measuring, and managing catastrophe risks

Recent decades were characterized by an unprecedented surge in the frequency and severity of catastrophes, either natural or man-made, many of which wrought havoc on the environment, economy, and society on a large scale despite their low likelihood of happening. This research endeavors to establish a robust approach to modeling, measuring, and managing a wide variety of catastrophe risks.

(2) Systemic risk and financial networks

According to the Reserve Bank of Australia, systemic risk describes the risk that the inability of one participant to meet its obligations in a system will cause other participants to be unable to meet their obligations, potentially with spillover effects threatening the stability of or confidence in the financial system. The network among the participants may either help reduce the systemic risk thanks to diversification effect or create a channel for propagation of the systemic risk. This research focuses on such an intriguing non-monotonic effect of the network integration.

(3) Pricing in incomplete markets

Contemporary financial instruments such as catastrophe bonds and insurance-linked securities often contain both tradable and non-tradable components. Issues such as friction and illiquidity violate the basic arbitrage-free assumption and revoke the validity of using arbitrage pricing theory for such a market. This research aims to develop economically sound pricing frameworks from the perspectives of utility theory, robust optimization, and quantitative risk management.

(4) Portfolio theory under model uncertainty

Decision makers resort to models and calibration procedures that capture stylized features based on experience or expert knowledge but often bear the risk of deviating too much from reality. To tackle such a model uncertainty issue, currently prevailing distributionally robust optimization (DRO) techniques often produce over-conservative solutions. This research aims to quantify the impact of model uncertainty and develop DRO techniques under partial uncertainty. The study has roots in economics, operations research, and statistics.

(5) Climate change and insurance

The changing environment is significantly altering the financial landscape of the insurance industry, while a dominating driving force for this is climate change. The economic consequences of climate change propagate through physical, social, and financial channels, constituting a rapidly changing and highly uncertain external environment for the insurance industry. This project first considers quantifying the impacts of climate change on insurance and then proposes an insurance approach to mitigating climate change risk.