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

Weihao Choo, Piet de Jong

Research output: Contribution to journalArticleResearchpeer-review

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.

LanguageEnglish
Pages238-246
Number of pages9
JournalInsurance: Mathematics and Economics
Volume65
DOIs
Publication statusPublished - 1 Nov 2015

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Insurance
Trade-offs
Cumulative Prospect Theory
Subjective Probability
Weighted Average
Pricing
Adjustment
Minimise
Generalization
Insurance premium
Premium
Zero

Cite this

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The tradeoff insurance premium as a two-sided generalisation of the distortion premium. / Choo, Weihao; de Jong, Piet.

In: Insurance: Mathematics and Economics, Vol. 65, 01.11.2015, p. 238-246.

Research output: Contribution to journalArticleResearchpeer-review

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