IDEAS home Printed from https://ideas.repec.org/p/msh/ebswps/2004-1.html
   My bibliography  Save this paper

The Power Principle and Tail-Fatness Uncertainty

Author

Listed:
  • Roger Gay

    ()

Abstract

When 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.

Suggested Citation

  • Roger Gay, 2004. "The Power Principle and Tail-Fatness Uncertainty," Monash Econometrics and Business Statistics Working Papers 1/04, Monash University, Department of Econometrics and Business Statistics.
  • Handle: RePEc:msh:ebswps:2004-1
    as

    Download full text from publisher

    File URL: http://www.buseco.monash.edu.au/ebs/pubs/wpapers/2004/wp1-04.pdf
    Download Restriction: no

    More about this item

    Keywords

    Exponential principle; power principle; constant risk aversion; ratio premium; stop-loss insurance;

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:msh:ebswps:2004-1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dr Xibin Zhang) or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/dxmonau.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.