Optimal Premium Pricing for a Heterogeneous Portfolio of Insurance Risks | Zendy

Athanasios A. Pantelous | Zendy; Nicholas Frangos | Zendy; Alexandros Α. Zimbidis | Zendy

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Optimal Premium Pricing for a Heterogeneous Portfolio of Insurance Risks

Author(s) -

Athanasios A. Pantelous,

Nicholas Frangos,

Alexandros Α. Zimbidis

Publication year - 2009

Publication title -

journal of probability and statistics

Language(s) - English

Resource type - Journals

eISSN - 1687-9538

pISSN - 1687-952X

DOI - 10.1155/2009/451856

Subject(s) - portfolio , volatility (finance) , brownian motion , risk premium , insurance premium , geometric brownian motion , mathematical optimization , constant (computer programming) , economics , portfolio insurance , portfolio optimization , econometrics , replicating portfolio , computer science , actuarial science , mathematics , financial economics , diffusion process , statistics , economy , programming language , service (business)

The paper revisits the classical problem of premium rating within a heterogeneous portfolio of insurance risks using a continuous stochastic control framework. The portfolio is divided into several classes where each class interacts with the others. The risks are modelled dynamically by the means of a Brownian motion. This dynamic approach is also transferred to the design of the premium process. The premium is not constant but equals the drift of the Brownian motion plus a controlled percentage of the respective volatility. The optimal controller for the premium is obtained using advanced optimization techniques, and it is finally shown that the respective pricing strategy follows a more balanced development compared with the traditional premium approaches

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