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

Weihao Choo; Piet de Jong

doi:10.1016/j.insmatheco.2015.09.014

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 journal › Article › peer-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 language	English
Pages (from-to)	238-246
Number of pages	9
Journal	Insurance: Mathematics and Economics
Volume	65
DOIs	https://doi.org/10.1016/j.insmatheco.2015.09.014
Publication status	Published - 1 Nov 2015

Keywords

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

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10.1016/j.insmatheco.2015.09.014

Cite this

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AB - 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.

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KW - Loss appetite

KW - Loss aversion reserve

KW - Spectral risk

KW - Two-sided

KW - Weighted premium

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ER -

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

Abstract

Keywords

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