Dept. Math, Hokkaido Univ. EPrints Server

Optimal intertemporal risk allocation applied to insurance pricing

Preprint Series # 882
Fukuda, Kei and Inoue, Akihiko and Nakano, Yumiharu Optimal intertemporal risk allocation applied to insurance pricing. (2007);

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We present a general approach to the pricing of products in finance and insurance in the multi-period setting. It is a combination of the utility indifference pricing and optimal intertemporal risk allocation. We give a characterization of the optimal intertemporal risk allocation by a first order condition. Applying this result to the exponential utility function, we obtain an essentially new type of premium calculation method for a popular type of multi-period insurance contract. This method is simple and can be easily implemented numerically. We see that the results of numerical calculations are well coincident with the risk loading level determined by traditional practices. The results also suggest a possible implied utility approach to insurance pricing.

Item Type:Preprint
Additional Information:20
Uncontrolled Keywords:Indifference pricing, optimal intertemporal risk allocation, Pareto optimality, exponential utility, insurance, premium calculation method
Subjects:62-xx STATISTICS
ID Code:1788