The Power Principle and Tail-fatness Uncertainty
Gay, Roger
10.4225/03/59fbb52b8f94b
https://bridges.monash.edu/articles/journal_contribution/The_Power_Principle_and_Tail-fatness_Uncertainty/5566996
When insurance claims are governed by fat-tailed distributions, gross uncertainty about the value of the tail-fatness index is virtually inescapable. In this paper a new premium principle (the power principle) analogous to the exponential principle for thin-tailed claims, is discussed. Pareto premiums determined under the principle have a transparent ratio structure, cater convincingly for uncertainty in the tail-fatness index, and are applicable in passage to the extremal limit, to all fat-tailed distributions in the domain of attraction of the (Frechet) extreme-value distribution. Cover can be provided for part claims if existence of the claims mean is in doubt. Stop-loss premiums are also discussed. Mathematical requirements are very modest.
2017-11-03 00:15:38
Exponential principle
power principle
constant risk aversion
ratio premium
stop-loss insurance
2004
1959.1/2349
monash:2349