NANSENSE

Applying Extreme Value Theory to Katrina

What does it mean if a distribution have values that display extreme deviations from the mean?

Here is a possible explanation.

The extreme deviations represent the risk in our population. If the event that represent the extreme deviations are triggered, then the losses associated with the values usually tend to be extreme.

Under normal circumstances, the impact caused by a hurricance would have been minimal, and hence the insurance coverage for a flood may have been minimal. In the case of the KATRINA, the hurricanes resulted in extreme floods. The losses tied to KATRINA was relatively higher as the insurance did not accomodate the extreme values when the coverage was initiated.

The moral of the story is that if we have a project or a program, we may want to first identify the extreme values of the population as a risk. We may also want to identify the likelihood and impact of the risk. We may want to keep in mind that sometimes the likelihood of an event may seem minimal but the event triggers, the impact of the event can be catastrophic.

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