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New fuzzy insurance pricing method for giga-investment project insurance

Author

Listed:
  • Luukka, Pasi
  • Collan, Mikael

Abstract

Large industrial investments, also called giga-investments, are a risky business and to attract financing they often require project insurance to mitigate risks. Giga-investments have long economic lives and can often steer their markets: information available is non-stochastic, normative, and often imprecise. The type of uncertainty that faces giga-investments is parametric and structural. We use possibility theory as a mathematical framework for modeling giga-investment profitability and based on the profitability models derive a new and intuitive four-step procedure for pricing giga-investment project insurance that is based on creating a pay-out distribution for the giga-investment project insurance contract. We present a set of numerical illustrations of insurance pricing with the new method.

Suggested Citation

  • Luukka, Pasi & Collan, Mikael, 2015. "New fuzzy insurance pricing method for giga-investment project insurance," Insurance: Mathematics and Economics, Elsevier, vol. 65(C), pages 22-29.
  • Handle: RePEc:eee:insuma:v:65:y:2015:i:c:p:22-29
    DOI: 10.1016/j.insmatheco.2015.08.002
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    References listed on IDEAS

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    More about this item

    Keywords

    Insurance pricing; Project insurance; Possibility distribution; Pay-off method; Pay-out distribution; Parametric uncertainty; Structural uncertainty;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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