Optimal pricing of a heterogeneous portfolio for a given risk level

Research output: Contribution to journalArticlepeer-review

Abstract

Consider a portfolio containing heterogeneous risks, where the policyholders' premiums to the insurance company might not cover the claim payments. This risk has to be taken into consideration in the premium pricing. On the other hand, the premium that the insureds pay has to be fair. This fairness is measured by the distance between the risk and the premium paid. We apply a non-linear programming formulation to find the optimal premium for each class so that the risk is below a given level and the weighted distance between the risk and the premium is minimized. We consider also the dual problem: minimizing the risk level for a given weighted distance between risks and premium.

Original languageEnglish
Pages (from-to)161-185
Number of pages25
JournalASTIN Bulletin
Volume36
Issue number1
DOIs
StatePublished - May 2006

Keywords

  • Dual problem
  • Heterogeneous portfolio
  • Non-linear programming
  • Positive definite matrix

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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