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Ambiguity and insurance: capital requirements andpremiums

Dietz, Simon and Walker, Oliver (2017) Ambiguity and insurance: capital requirements andpremiums. Journal of Risk and Insurance. ISSN 0022-4367

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Identification Number: 10.1111/jori.12208

Abstract

Many insurance contracts are contingent on events such as hurricanes, terrorist attacks or political upheavals, whose probabilities are ambiguous. This paper offers a theory to underpin the large body of empirical evidence showing that higher premiums are charged under ambiguity. We model a (re)insurer who maximises 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 towards this ambiguity. We characterise 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.

Item Type: Article
Official URL: http://journalofriskandinsurance.smeal.psu.edu/
Additional Information: © 2017 The American Risk and Insurance Association
Subjects: H Social Sciences > HD Industries. Land use. Labor > HD61 Risk Management
JEL classification: D - Microeconomics > D8 - Information, Knowledge, and Uncertainty > D81 - Criteria for Decision-Making under Risk and Uncertainty
G - Financial Economics > G2 - Financial Institutions and Services > G22 - Insurance; Insurance Companies
Sets: Research centres and groups > Grantham Research Institute on Climate Change and the Environment
Date Deposited: 30 Nov 2016 12:05
Last Modified: 23 Oct 2017 12:46
Projects: ES/K006576/1
Funders: Economic and Social Research Council
URI: http://eprints.lse.ac.uk/id/eprint/68469

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