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The tradeoff insurance premium as a two-sided generalisation of the distortion premium

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  • Choo, Weihao
  • de Jong, Piet

Abstract

This paper introduces and analyzes the “tradeoff premium”, generalising the loss aversion reserve, distortion premium, spectral risk, and their duals. The tradeoff premium is a weighted average loss where weights increase as loss outcomes deviate from a subjective “loss appetite”, rather than from zero. The U-shaped weights replicate subjective probability adjustment in cumulative prospect theory, and minimise pricing error in a competitive market where overpricing and underpricing are both undesired.

Suggested Citation

  • Choo, Weihao & de Jong, Piet, 2015. "The tradeoff insurance premium as a two-sided generalisation of the distortion premium," Insurance: Mathematics and Economics, Elsevier, vol. 65(C), pages 238-246.
    • Handle: RePEc:eee:insuma:v:65:y:2015:i:c:p:238-246
    DOI: 10.1016/j.insmatheco.2015.09.014
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    References listed on IDEAS

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    Cited by:

    1. Furman, Edward & Kuznetsov, Alexey & Zitikis, Ričardas, 2018. "Weighted risk capital allocations in the presence of systematic risk," Insurance: Mathematics and Economics, Elsevier, vol. 79(C), pages 75-81.

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