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Pricing insurance contracts under Cumulative Prospect Theory

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  • Kaluszka, Marek
  • Krzeszowiec, Michał

Abstract

The aim of this paper is to introduce a premium principle which relies on Cumulative Prospect Theory by Kahneman and Tversky. Some special cases of this premium principle have already been studied in the actuarial literature. In the paper, properties of this premium principle are examined.

Suggested Citation

  • Kaluszka, Marek & Krzeszowiec, Michał, 2012. "Pricing insurance contracts under Cumulative Prospect Theory," Insurance: Mathematics and Economics, Elsevier, vol. 50(1), pages 159-166.
    • Handle: RePEc:eee:insuma:v:50:y:2012:i:1:p:159-166
    DOI: 10.1016/j.insmatheco.2011.11.001
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    References listed on IDEAS

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    Full references (including those not matched with items on IDEAS)

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    Cited by:

    1. Martina Nardon & Paolo Pianca, 2019. "Insurance premium calculation under continuous cumulative prospect theory," Working Papers 2019:03, Department of Economics, University of Venice "Ca' Foscari".
    2. Belles-Sampera, Jaume & Merigó, José M. & Guillén, Montserrat & Santolino, Miguel, 2013. "The connection between distortion risk measures and ordered weighted averaging operators," Insurance: Mathematics and Economics, Elsevier, vol. 52(2), pages 411-420.
    3. Kaluszka, Marek & Krzeszowiec, Michał, 2013. "On iterative premium calculation principles under Cumulative Prospect Theory," Insurance: Mathematics and Economics, Elsevier, vol. 52(3), pages 435-440.
    4. Joanna Dębicka & Stanisław Heilpern, 2018. "Valuation and optimization of contracts on the secondary insurance market," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 51, pages 37-62.
    5. Chudziak, J., 2018. "On existence and uniqueness of the principle of equivalent utility under Cumulative Prospect Theory," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 243-246.
    6. Mao, Tiantian & Stupfler, Gilles & Yang, Fan, 2023. "Asymptotic properties of generalized shortfall risk measures for heavy-tailed risks," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 173-192.
    7. Joanna Dębicka & Stanisław Heilpern, 2020. "The optimization of insurance contracts on the viatical market," Operations Research and Decisions, Wroclaw University of Science and Technology, Faculty of Management, vol. 30(2), pages 5-27.
    8. Martina Nardon & Paolo Pianca, 2019. "Behavioral premium principles," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 42(1), pages 229-257, June.
    9. Bai, Chunguang & Sarkis, Joseph, 2017. "Improving green flexibility through advanced manufacturing technology investment: Modeling the decision process," International Journal of Production Economics, Elsevier, vol. 188(C), pages 86-104.
    10. Christian Biener & Martin Eling, 2013. "Recent Research Developments Affecting Nonlife Insurance—The CAS Risk Premium Project 2012 Update," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 16(2), pages 219-231, September.
    11. Kaluszka, M. & Laeven, R.J.A. & Okolewski, A., 2012. "A note on weighted premium calculation principles," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 379-381.
    12. Chudziak, J., 2020. "On positive homogeneity and comonotonic additivity of the principle of equivalent utility under Cumulative Prospect Theory," Insurance: Mathematics and Economics, Elsevier, vol. 94(C), pages 154-159.
    13. Tiantian Mao & Jun Cai, 2018. "Risk measures based on behavioural economics theory," Finance and Stochastics, Springer, vol. 22(2), pages 367-393, April.
    14. Cheung, Ka Chun & Yam, Sheung Chi Phillip & Zhang, Yiying, 2019. "Risk-adjusted Bowley reinsurance under distorted probabilities," Insurance: Mathematics and Economics, Elsevier, vol. 86(C), pages 64-72.
    15. Sainan Zhang & Huifu Xu, 2022. "Insurance premium-based shortfall risk measure induced by cumulative prospect theory," Computational Management Science, Springer, vol. 19(4), pages 703-738, October.
    16. Zhuang, Sheng Chao & Weng, Chengguo & Tan, Ken Seng & Assa, Hirbod, 2016. "Marginal Indemnification Function formulation for optimal reinsurance," Insurance: Mathematics and Economics, Elsevier, vol. 67(C), pages 65-76.
    17. Marek Kałuszka & Michał Krzeszowiec, 2013. "Iteracyjność składek ubezpieczeniowych w ujęciu teorii skumulowanej perspektywy i teorii nieokreśloności," Collegium of Economic Analysis Annals, Warsaw School of Economics, Collegium of Economic Analysis, issue 31, pages 45-56.

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    More about this item

    Keywords

    Cumulative Prospect Theory; Premium principle; Non-expected utility;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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