The Hazards Game
This game simulates the damage caused by Earthquakes, Tornados, and Hurricanes to the houses in Hazland. But not to worry, there are never any casualties, and the damage is covered by insurance. Each player (you) manages their own insurance company by setting (and changing) the insurance coverage rates in different regions of Hazland. The residents shop around to buy their insurance from you or your competitors. Then natural hazards "happen", and you pay the damages to your customers. The only action you control is changing your insurance coverage rates once per year, and the main objective is to survive -- that is, to keep your company's bank account positive!
Here is a map of Hazland:
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The overall land area of Hazland is 2 "squares", and the total number of houses is 30,000. Each and every house in Hazland will be insured for $10,000.
You can imagine that each time step of the simulation represents one year. Each insurance company (player) turns in their rates to the "insurance secretary" at the beginning of the year, and the 30,000 consumers then pay the annual fee to their company, which is deposited to the company's bank account. Each year, many of the consumers will shop around to find the lowest rates, and hence possibly change their choice of insurance company (the computer does all this shopping work!). Now, during the year, earthquakes, tornados, and hurricanes cause partial ($1,000 claim) or total ($10,000 claim) damage to many houses. At the end of the year, the "insurance secretary" determines which company is responsible for the individual claims, and automatically pays that amount from the company's bank account. In addition, there is a fixed amount deducted from the compan'y bank account each year (see * below). Then, there is a brief period of time during which the insurance company (player) can assess their finances and the rates of all their competitors for the past, and then turn-in their rates to the "insurance secretary" for the next year. There is a restriction on the rate change in any given year: the new rate that you set for each region must be within the range of 75% to 125% of your rate from the previous year.
To begin play, each company is given a loan of $1,000,000 from the insurance secretary. Also, the insurance secretary randomly assigns all the consumers to the insurance companies, and the rates for the first year are set at:
$100. for every house.
After the first year, each compnay (player) can then change the rates from this initial uniform value.
(* Each year, the company must pay the insurance secretary $100,000. The company has no other expenses, except for paying out claims.)
The population and hazards of the regions:
(Note: the houses are evenly distributed within each region, although the house density varies between the regions).
- SW: "southwest region", land area = 0.25 "squares", population = 10,000 houses. Earthquakes are the hazard in SW, there are three distinct sizes of damaging earthquakes (M=7, M=6, & M=5). Investigations have determined the following recurrence rates and areas of damage for earthquakes in SW:
- M=7: occurs about once every ten years, land area of damage is about 0.045 "squares".
- M=6: occurs about once every year, land area of damage is about 0.003 "squares".
- M=5: there are about 10 M=5 earthquakes every year, land area of damage is about 0.00025 "squares".
- W: "west region", land area = 0.75 "squares", population = 5,000 houses. Earthquakes are the hazard in SW, there are three distinct sizes of damaging earthquakes (M=7, M=6, & M=5). Investigations have determined the following recurrence rates and areas of damage for earthquakes in W:
- M=7: occurs about once every fifty years, land area of damage is about 0.045 "squares".
- M=6: occurs about once every five years, land area of damage is about 0.003 "squares".
- M=5: there are about 2 M=5 earthquakes every year, land area of damage is about 0.00025 "squares".
- NE: "northeast region", land area = 0.50 "squares", population = 7,500 houses. Tornados are the hazard in NE, there are two distinct sizes of damaging tornados (big & small). Unlike the other hazards, the damage from a tornado is a total loss if it hits a house. Investigations have not determined the total number of tornados each year, but they have discovered that::
- The average number of tornados per year that hit a house is 55.
- Of those 55 tornados, about 5 of them damage more than 1 house, where the averge number of houses hit by one of these big tornados is 5.
- SE: "southeast region", land area = 0.50 "squares", population = 7,500 houses. Hurricanes are the hazard in SE, there are three distinct sizes of damaging hurricanes (Cat=3, Cat=2, & Cat=1). Investigations have determined the following likelihood and areas of damage for hurricanes in SE:
- Cat=3: occurs about once every five years, land area of damage is about 0.080 "squares".
- Cat=2: occurs about once every year, land area of damage is about 0.014 "squares".
- Cat=1: there are about 5 Cat=1 hurricanes every year, land area of damage is about 0.002 "squares".
Note: Houses that are partially or totally damaged are completely rebuilt by the next time period, and they are still in the market for insurance.
Here is a brief description of how the houses shop around to find lower insurance rates:
- In any given year, if their current insurance company keeps the rate the same, 50% of the houses will shop around for a cheaper rate.
- In any given year, if their current insurance company lowers the rate, 33% of the houses will shop around for a cheaper rate.
- In any given year, if their current insurance company increases the rate, 67% of the houses will shop around for a cheaper rate.
For those houses that shop around, not all of them will leave their old company, even if they find a somewhat cheaper rate. Here is the behavior:
- Each house will compare rates from just 10 randomly selected competitors, and then will compare the cheapest rate to their old company's rate.
- If the cheapest rate from these ten companies is less than 50% of the old company's rate, then it is 100% certain that the house will switch to a different company.
- The likelihood of switching to a different company then decreases from 100% to 0% as the cheapest rate varies from 50% to 100% of the old company's rate.
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