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Accounting for severity of risk when pricing insurance products

Author

Listed:
  • Ramon Alemany

    () (Department of Econometrics, Riskcenter-IREA, Universitat de Barcelona)

  • Catalina Bolance

    () (Department of Econometrics, Riskcenter-IREA, Universitat de Barcelona)

  • Montserrat Guillen

    () (Department of Econometrics, Riskcenter-IREA, Universitat de Barcelona)

Abstract

We design a system for improving the calculation of the price to be charged for an insurance product. Standard pricing techniques generally take into account the expected severity of potential losses. However, the severity of a loss can be extremely high and the risk of a severe loss is not homogeneous for all policy holders. We argue that risk loadings should be based on risk evaluations that avoid too many model assumptions. We apply a nonparametric method and illustrate our contribution with a real problem in the area of motor insurance.

Suggested Citation

  • Ramon Alemany & Catalina Bolance & Montserrat Guillen, 2014. "Accounting for severity of risk when pricing insurance products," Working Papers 2014-05, Universitat de Barcelona, UB Riskcenter.
  • Handle: RePEc:bak:wpaper:201405
    as

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    File URL: http://www.ub.edu/rfa/research/WP/UBriskcenterWP201405.pdf
    File Function: First version, 2014
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    References listed on IDEAS

    as
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    Cited by:

    1. Estefanía Alaminos & Mercedes Ayuso, 2015. "Methodological Approach of a Multiple State Actuarial Model for the Married - Widower case for the assessment of retirement and widowhood pensions," Working Papers 2015-04, Universitat de Barcelona, UB Riskcenter.

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    Keywords

    quantile; value-at-risk; loss models; extremes;

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