The Power Principle and Tail-Fatness Uncertainty
AbstractWhen insurance claims are governed by fat-tailed distributions, gross uncertainty about the value of the tail-fatness index is virtually inescapable. In this paper a new premium principle (the power principle) analogous to the exponential principle for thin-tailed claims, is discussed. Pareto premiums determined under the principle have a transparent ratio structure, cater convincingly for uncertainty in the tail-fatness index, and are applicable in passage to the extremal limit, to all fat-tailed distributions in the domain of attraction of the (Frechet) extreme-value distribution. Cover can be provided for part claims if existence of the claims mean is in doubt. Stop-loss premiums are also discussed. Mathematical requirements are very modest.
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Bibliographic InfoPaper provided by Monash University, Department of Econometrics and Business Statistics in its series Monash Econometrics and Business Statistics Working Papers with number 1/04.
Length: 18 pages
Date of creation: Feb 2004
Date of revision:
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Postal: PO Box 11E, Monash University, Victoria 3800, Australia
Web page: http://www.buseco.monash.edu.au/depts/ebs/
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- G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies
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