Time-consistent actuarial valuations

A.A.J. Pelsser, A. Salahnejhad Ghalehjooghi

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Abstract

Time-consistent valuations (i.e. pricing operators) can be created by backward iteration of one-period valuations. In this paper we investigate the continuous-time limits of well-known actuarial premium principles when such backward iteration procedures are applied. This method is applied to an insurance risk process in the form of a diffusion process and a jump process in order to capture the heavy tailed nature of insurance liabilities. We show that in the case of the diffusion process, the one-period time-consistent Variance premium principle converges to the non-linear exponential indifference price. Furthermore, we show that the Standard-Deviation and the Cost-of-Capital principle converge to the same price limit. Adding the jump risk gives a more realistic picture of the price. Furthermore, we no longer observe that the different premium principles converge to the same limit since each principle reflects the effect of the jump differently. In the Cost-of-Capital principle, in particular the VaRVaR operator fails to capture the jump risk for small jump probabilities, and the time-consistent price depends on the distribution of the premium jump.
Original languageEnglish
Pages (from-to)97-112
Number of pages16
JournalInsurance: Mathematics and Economics
Volume66
Issue number1
DOIs
Publication statusPublished - 1 Jan 2016

Keywords

  • Time-consistent
  • Actuarial valuation
  • Backward iteration
  • Infinitesimal generator
  • Jump process
  • Partial Differential Equation
  • MONETARY RISK MEASURES
  • DISCRETE-TIME
  • COHERENT
  • MORTALITY
  • CLAIMS
  • MODEL

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