The tradeoff insurance premium as a two-sided generalisation of the distortion premium

Weihao Choo*, Piet de Jong

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)

Abstract

This paper introduces and analyzes the "tradeoff premium", generalising the loss aversion reserve, distortion premium, spectral risk, and their duals. The tradeoff premium is a weighted average loss where weights increase as loss outcomes deviate from a subjective "loss appetite", rather than from zero. The U-shaped weights replicate subjective probability adjustment in cumulative prospect theory, and minimise pricing error in a competitive market where overpricing and underpricing are both undesired.

Original languageEnglish
Pages (from-to)238-246
Number of pages9
JournalInsurance: Mathematics and Economics
Volume65
DOIs
Publication statusPublished - 1 Nov 2015

Keywords

  • Distortion premium
  • Loss appetite
  • Loss aversion reserve
  • Spectral risk
  • Two-sided
  • Weighted premium

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