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Demand of Insurance under the Cost-of-Capital Premium Calculation Principle

Author

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  • Michael Merz

    (Department of Business Administration, University of Hamburg, 20146 Hamburg, Germany)

  • Mario V. Wüthrich

    (RiskLab, Department of Mathematics, ETH Zurich, 8092 Zurich, Switzerland
    Swiss Finance Institute SFI Professor, 8006 Zurich, Switzerland)

Abstract

We study the optimal insurance design problem. This is a risk sharing problem between an insured and an insurer. The main novelty in this paper is that we study this optimization problem under a risk-adjusted premium calculation principle for the insurance cover. This risk-adjusted premium calculation principle uses the cost-of-capital approach as it is suggested (and used) by the regulator and the insurance industry.

Suggested Citation

  • Michael Merz & Mario V. Wüthrich, 2014. "Demand of Insurance under the Cost-of-Capital Premium Calculation Principle," Risks, MDPI, vol. 2(2), pages 1-23, June.
    • Handle: RePEc:gam:jrisks:v:2:y:2014:i:2:p:226-248:d:37193
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    References listed on IDEAS

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    1. Gollier, Christian & Schlesinger, Harris, 1996. "Arrow's Theorem on the Optimality of Deductibles: A Stochastic Dominance Approach," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(2), pages 359-363, February.
    2. Raviv, Artur, 1979. "The Design of an Optimal Insurance Policy," American Economic Review, American Economic Association, vol. 69(1), pages 84-96, March.
    3. Kamien, Morton I. & Schwartz, Nancy L., 1971. "Sufficient conditions in optimal control theory," Journal of Economic Theory, Elsevier, vol. 3(2), pages 207-214, June.
    4. Yaari, Menahem E, 1987. "The Dual Theory of Choice under Risk," Econometrica, Econometric Society, vol. 55(1), pages 95-115, January.
    5. Alexandru V. Asimit & Raluca Vernic & Riċardas Zitikis, 2013. "Evaluating Risk Measures and Capital Allocations Based on Multi-Losses Driven by a Heavy-Tailed Background Risk: The Multivariate Pareto-II Model," Risks, MDPI, vol. 1(1), pages 1-20, March.
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    Cited by:

    1. Alexandru V. Asimit & Raluca Vernic & Ricardas Zitikis, 2016. "Background Risk Models and Stepwise Portfolio Construction," Methodology and Computing in Applied Probability, Springer, vol. 18(3), pages 805-827, September.
    2. Eric C. K. Cheung & Oscar Peralta & Jae-Kyung Woo, 2021. "Multivariate matrix-exponential affine mixtures and their applications in risk theory," Papers 2201.11122, arXiv.org.
    3. Cheung, Eric C.K. & Peralta, Oscar & Woo, Jae-Kyung, 2022. "Multivariate matrix-exponential affine mixtures and their applications in risk theory," Insurance: Mathematics and Economics, Elsevier, vol. 106(C), pages 364-389.
    4. Su, Jianxi & Hua, Lei, 2017. "A general approach to full-range tail dependence copulas," Insurance: Mathematics and Economics, Elsevier, vol. 77(C), pages 49-64.

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