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Insurance pricing in small size markets

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  • Darooneh, Amir H.

Abstract

In analogy with standard derivation of Tsallis factor in non extensive statistical mechanics, we find the wealth distribution for an economic agent in a conservative exchange market. Tsallis entropic index distinguish between two different regimes, the large and small size market. The Pareto like wealth distribution is obtained in the case of small size market. We consider the insurance market as an example of conservative exchange market and suggest a new method for insurance pricing based on the wealth distribution in the market. We generalize the Esscher transform for the insurance pricing and simulate a real case of the car insurance. The results show the initial wealth of an insurer company in a small size market should be greater than a threshold value.

Suggested Citation

  • Darooneh, Amir H., 2007. "Insurance pricing in small size markets," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 380(C), pages 411-417.
    • Handle: RePEc:eee:phsmap:v:380:y:2007:i:c:p:411-417
    DOI: 10.1016/j.physa.2007.02.110
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    Cited by:

    1. Lai, Li-Hua, 2015. "Statistical premium in correlated losses of insurance," Economic Modelling, Elsevier, vol. 49(C), pages 248-253.
    2. Joseph C. Hartman & Kamonkan Laksana, 2009. "Designing and pricing menus of extended warranty contracts," Naval Research Logistics (NRL), John Wiley & Sons, vol. 56(3), pages 199-214, April.
    3. Hu, Feng-Rung, 2008. "On the estimation of the power-law exponent in the mean-field Bouchaud–Mézard model," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 387(18), pages 4605-4614.

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