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An Actuarial Premium Pricing Model for Nonnormal Insurance and Financial Risks in Incomplete Markets

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  • Zinoviy Landsman
  • Michael Sherris

Abstract

A model for pricing insurance and financial risks, based on recent developments in actuarial premium principles with elliptical distributions, is developed for application to incomplete markets and heavy-tailed distributions. The pricing model involves an application of a generalized variance premium principle from insurance pricing to the pricing of a portfolio of nontraded risks relative to a portfolio of traded risks. This pricing model for a portfolio of insurance or financial risks reflects preferences for features of the distributions other than mean and variance, including kurtosis. The model reduces to the Capital Asset Pricing Model for multinormal portfolios and to a form of the CAPM in the case where the traded and nontraded risks have the same elliptical distribution.

Suggested Citation

  • Zinoviy Landsman & Michael Sherris, 2007. "An Actuarial Premium Pricing Model for Nonnormal Insurance and Financial Risks in Incomplete Markets," North American Actuarial Journal, Taylor & Francis Journals, vol. 11(1), pages 119-135.
    • Handle: RePEc:taf:uaajxx:v:11:y:2007:i:1:p:119-135
    DOI: 10.1080/10920277.2007.10597440
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    Cited by:

    1. Furman, Edward & Zitikis, Ricardas, 2008. "Weighted risk capital allocations," Insurance: Mathematics and Economics, Elsevier, vol. 43(2), pages 263-269, October.

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