Global Index on Financial Losses due to Crime in the United States

TL;DR

This paper introduces a novel index-based insurance portfolio for crime-related financial losses in the US, utilizing FBI data to help investors assess and hedge against crime risks, especially in real estate and cybercrime sectors.

Contribution

It develops the first index-based insurance model for US crime-related financial losses, combining marketable options and risk diversification strategies.

Findings

Real estate, ransomware, and government impersonation are key risk contributors.

The unemployment rate shows high systemic risk impact.

The index demonstrates resilience to economic crises.

Abstract

Crime can have a volatile impact on investments. Despite the potential importance of crime rates in investments, there are no indices dedicated to evaluating the financial impact of crime in the United States. As such, this paper presents an index-based insurance portfolio for crime in the United States by utilizing the financial losses reported by the Federal Bureau of Investigation for property crimes and cybercrimes. Our research intends to help investors envision risk exposure in our portfolio, gauge investment risk based on their desired risk level, and hedge strategies for potential losses due to economic crashes. Underlying the index, we hedge the investments by issuing marketable European call and put options and providing risk budgets (diversifying risk to each type of crime). We find that real estate, ransomware, and government impersonation are the main risk contributors. We then evaluate the performance of our index to determine its resilience to economic crisis. The unemployment rate potentially demonstrates a high systemic risk on the portfolio compared to the economic factors used in this study. In conclusion, we provide a basis for the securitization of insurance risk from certain crimes that could forewarn investors to transfer their risk to capital market investors.