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Underwriting and Ambiguity: An Economic Analysis

Author

Listed:
  • Patrick L. Brockett
  • Gene C. Lai
  • Steven W. Pottier
  • Robert C. Witt

Abstract

A simplified financial-economic theory of the insurance firm under uncertainty is used to determine whether ambiguity about the expected claim frequency and/or the claim severity distribution for potential insured losses has any impact on the insurance rate. The model shows that the risk charge for ambiguity in both the claim frequency and claim severity distributions is higher than the risk charge for ambiguity in either the claim frequency or claim severity distribution alone. Our theoretical results are consistent with underwriters’ decisions and provide a more complete analysis of the insurance premium setting process than prior research.

Suggested Citation

  • Patrick L. Brockett & Gene C. Lai & Steven W. Pottier & Robert C. Witt, 1999. "Underwriting and Ambiguity: An Economic Analysis," Journal of Insurance Issues, Western Risk and Insurance Association, vol. 22(1), pages 1-25.
    • Handle: RePEc:wri:journl:v:22:y:1999:i:1:p:1-25
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