The Surplus Process As A Fair Game—Utilitywise

The concept of utility is twofold. One may think of utility:1) as a tool to describe a “fair game†2) as a quantity that ought to be maximized.The first line of thought was initiated by Daniel Bernoulli in connection with the St. Petersburg Paradox. In recent decades, actuaries, economists, operations researchers and statisticians (this order is alphabetical) have been concerned mostly with optimization problems, which belong to the second category. Most of the actuarial models can be found in a paper by Borch [4] as well as in the texts by Beard, Pesonen and Pentikainen [3], Bühlmann [6], Seal [15], and Wolff [17].We shall adopt the first variant and stipulate the existence of a utility function such that the surplus process of an insurance company is a fair game in terms of utility. This condition is naturally satisfied under the following procedure: a) a utility function is selected, possibly resulting from a compromise between an insurance company and supervising authorities, b) whenever the company makes a decision that affects the surplus, it should not affect the expected utility of the surplus.Mathematically, this simply means that the utility of the surplus is a martingale. Therefore martingale theory (that was initiated by Doob) is the natural framework in which we shall study the model. We shall utilize one of the most powerful tools provided by this theory, the Martingale Convergence Theorem.