Ambiguity and Insurance: Capital Requirements and Premiums
Many insurance contracts are contingent on events such as hurricanes, terrorist attacks, or political upheavals, whose probabilities are ambiguous. This article offers a theory to underpin the large body of empirical evidence showing that higher premiums are charged under ambiguity. We model a (re)i...
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| Veröffentlicht in: | The Journal of risk and insurance 2019-03, Vol.86 (1), p.213-235 |
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| container_end_page | 235 |
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| container_title | The Journal of risk and insurance |
| container_volume | 86 |
| creator | Dietz, Simon Walker, Oliver |
| description | Many insurance contracts are contingent on events such as hurricanes, terrorist attacks, or political upheavals, whose probabilities are ambiguous. This article offers a theory to underpin the large body of empirical evidence showing that higher premiums are charged under ambiguity. We model a (re)insurer that maximizes profit subject to a survival constraint that is sensitive to the range of estimates of the probability of ruin, as well as the insurer's attitude toward this ambiguity. We characterize when one book of insurance is more ambiguous than another and general circumstances in which a more ambiguous book requires at least as large a capital holding. We subsequently derive several explicit formulae for the price of insurance contracts under ambiguity, each of which identifies the extra ambiguity load. |
| doi_str_mv | 10.1111/jori.12208 |
| format | Article |
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| issn | 0022-4367 1539-6975 |
| language | eng |
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| source | EBSCOhost Business Source Complete; Access via Wiley Online Library; JSTOR Archive Collection A-Z Listing |
| subjects | Ambiguity Climate change Decision making Economic models Environmental aspects Forecasts and trends Hurricanes Insurance companies Insurance industry Insurance policies Methods Terrorism |
| title | Ambiguity and Insurance: Capital Requirements and Premiums |
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