Pricing Dynamic Insurance Risks Using the Principle of Equivalent Utility
نویسندگان
چکیده
We introduce an expected utility approach to price insurance risks in a dynamic nancial market setting. The valuation method is based on comparing the maximal expected utility functions with and without incorporating the insurance product, as in the classical principle of equivalent utility. The pricing mechanism relies heavily on risk preferences and yields two reservation prices—one each for the underwriter and buyer of the contract. The framework is rather general and applies to a number of applications that we extensively analyze.
منابع مشابه
On Valuing Equity-Linked Insurance and Reinsurance Contracts∗
Insurance companies are increasingly facing losses that have heavy exposure to capital market risks through the issuance of equity-linked insurance policies. In this paper, we determine the continuous premium rate that an insurer charges via the principle of equivalent utility. Using exponential utility, we obtain the resulting premium rate in terms of a risk-neutral expectation. We also consid...
متن کاملPricing Unemployment Insurance in Iran
Abstract Employees always concern about losing their job, or in other word, losing their income resources. For this purpose, governments require strong protection system for covering these concerns. The Unemployment Insurance (UI) program’s can be used for achieving this goal. Based on article five of Iranian unemployment Insurance law, premium is four percent of employee’s salary while emplo...
متن کاملA Unifying Approach to Pricing Insurance and Financial Risk
The actuarial and the financial approach to the pricing of risk remain different despite the increasingly direct interconnection of financial and insurance markets. The difference can be summarized as pricing based on classical risk theory (insurance) vs. non-arbitrage pricing (finance). However, comparable pricing principles are of importance when it comes to transferring insurance risk to fin...
متن کاملMarket Consistent Pricing of Insurance Products
We present the first step in a program to develop a comprehensive, unified equilibrium theory of asset and liability pricing. We give a mathematical framework for pricing insurance products in a multiperiod financial market. This framework reflects classical economic principles (like utility maximization) and generates pricing algorithms for non-hedgeable insurance risks.
متن کاملPortfolio Choice and Fair Pricing in Life and Pension Insurance
We investigate the implications of optimal portfolio choice on fair pricing of specific pension insurance contracts. We motivate that the manager of the insurance company should optimize utility of final payout for the policy holders. The payout to the policy holder is highly non-linear in wealth, implying that the optimization problem is non-trivial. Still, we find closed form solutions. Simul...
متن کامل