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Optimal strategies for a non-linear premium-reserve model in a competitive insurance market

Published online by Cambridge University Press:  22 September 2016

Athanasios A. Pantelous  and
Eudokia Passalidou
Athanasios A. Pantelous*
Affiliation:
Department of Mathematical Sciences, University of Liverpool, Liverpool L697ZL, UK Institute for Risk and Uncertainty, University of Liverpool, Liverpool L697ZL, UK
Eudokia Passalidou
Affiliation:
Department of Mathematical Sciences, University of Liverpool, Liverpool L697ZL, UK
*
*Correspondence to: Dr Athanasios A. Pantelous, Department of Mathematical Sciences, Institute for Risk and Uncertainty, University of Liverpool, Peach Street, Liverpool L697ZL, UK. Tel: +44 151 794 5079. E-mail: A.Pantelous@liverpool.ac.uk
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Abstract

The calculation of a fair premium is always a challenging topic in the real-world insurance applications. In this paper, a non-linear premium-reserve (P-R) model is presented and the premium is derived by minimising a quadratic performance criterion. The reserve is a stochastic equation, which includes an additive random non-linear function of the state, premium and not necessarily Gaussian noise, which is, however, independently distributed in time, provided only that the mean value and the covariance of the random function is 0 and a quadratic function of the state, premium and other parameters, respectively. In this quadratic representation of the covariance function, new parameters are implemented and enriched further by the previous linear models, such as the income insurance elasticity of demand, the number of insured and the inflation in addition to the company’s reputation. The quadratic utility function concerns the present value of the reserve. Interestingly, for the very first time, the derived optimal premium in a competitive market environment is also dependent on the company’s reserve among the other parameters. Finally, a numerical application illustrates the main findings of the paper.

Keywords

Non-linear premium-reserve pricing modelStochastic optimal controlQuadratic performance criterionCompetitive insurance marketsActuarial risk
Type
Papers
Information
Annals of Actuarial Science , Volume 11 , Issue 1 , March 2017 , pp. 1 - 19
Copyright
© Institute and Faculty of Actuaries 2016 

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