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From risk sharing to pure premium for a large number of heterogeneous losses

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  • Denuit, Michel
  • Robert, Christian Y.

Abstract

This paper considers linear fair risk sharing rules and the conditional mean risk sharing rule for independent but heterogeneous losses that are gathered in an insurance pool. It studies the asymptotic behavior of individual contributions to total losses when the number of participants to the pool tends to infinity. It is shown that (i) insurance at pure premium is obtained for an infinitely large pool and (ii) the difference between the actual contribution and the pure premium becomes ultimately Normally distributed. The linear fair risk sharing rule approximating the conditional mean risk sharing rule is then identified, providing practitioners with a useful simplification applicable within large pools. Also, the approximate number of participants required to keep the volatility of individual contributions within an acceptable range is obtained from the established asymptotic Normality.

Suggested Citation

  • Denuit, Michel & Robert, Christian Y., 2021. "From risk sharing to pure premium for a large number of heterogeneous losses," Insurance: Mathematics and Economics, Elsevier, vol. 96(C), pages 116-126.
    • Handle: RePEc:eee:insuma:v:96:y:2021:i:c:p:116-126
    DOI: 10.1016/j.insmatheco.2020.11.006
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    References listed on IDEAS

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    1. Denuit, Michel & Dhaene, Jan, 2012. "Convex order and comonotonic conditional mean risk sharing," Insurance: Mathematics and Economics, Elsevier, vol. 51(2), pages 265-270.
    2. Donnelly, C. & Young, J., 2017. "Product options for enhanced retirement income," British Actuarial Journal, Cambridge University Press, vol. 22(3), pages 636-656, September.
    3. Denuit, Michel, 2020. "Investing in your own and peers’ risks: the simple analytics of P2P insurance," LIDAM Reprints ISBA 2020026, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    4. Schumacher, Johannes M., 2018. "Linear Versus Nonlinear Allocation Rules In Risk Sharing Under Financial Fairness," ASTIN Bulletin, Cambridge University Press, vol. 48(3), pages 995-1024, September.
    5. Bühlmann, Hans & Jewell, William S., 1979. "Optimal Risk Exchanges," ASTIN Bulletin, Cambridge University Press, vol. 10(3), pages 243-262, December.
    6. Denuit, Michel & Robert, Christian Y., 2020. "Risk reduction by conditional mean risk sharing with application to collaborative insurance," LIDAM Discussion Papers ISBA 2020024, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    7. Denuit, Michel & Robert, Christian Y., 2020. "Large-Loss Behavior of Conditional Mean Risk Sharing," LIDAM Reprints ISBA 2020021, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    8. Denuit, Michel, 2019. "Size-Biased Transform And Conditional Mean Risk Sharing, With Application To P2p Insurance And Tontines," ASTIN Bulletin, Cambridge University Press, vol. 49(3), pages 591-617, September.
    9. Donnelly, Catherine, 2015. "Actuarial Fairness And Solidarity In Pooled Annuity Funds," ASTIN Bulletin, Cambridge University Press, vol. 45(1), pages 49-74, January.
    10. Denuit, Michel, 2019. "Size-biased transform and conditional mean risk sharing, with application to P2P insurance and tontines," LIDAM Discussion Papers ISBA 2019010, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    11. Denuit, Michel, 2019. "Size-biased transform and conditional mean risk sharing, with application to P2P insurance and tontines," LIDAM Reprints ISBA 2019038, Université catholique de Louvain, Institute of Statistics, Biostatistics and Actuarial Sciences (ISBA).
    12. 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.
    13. Denuit, Michel & Robert, Christian Y., 2020. "Large-Loss Behavior Of Conditional Mean Risk Sharing," ASTIN Bulletin, Cambridge University Press, vol. 50(3), pages 1093-1122, September.
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    Cited by:

    1. Michel Denuit & Christian Y. Robert, 2021. "Risk sharing under the dominant peer‐to‐peer property and casualty insurance business models," Risk Management and Insurance Review, American Risk and Insurance Association, vol. 24(2), pages 181-205, June.
    2. Denuit, Michel & Robert, Christian Y., 2021. "Stop-loss protection for a large P2P insurance pool," Insurance: Mathematics and Economics, Elsevier, vol. 100(C), pages 210-233.
    3. Blier-Wong, Christopher & Cossette, Hélène & Marceau, Etienne, 2023. "Risk aggregation with FGM copulas," Insurance: Mathematics and Economics, Elsevier, vol. 111(C), pages 102-120.
    4. Fallou Niakh, 2023. "A fixed point approach for computing actuarially fair Pareto optimal risk-sharing rules," Papers 2303.05421, arXiv.org, revised Jul 2023.
    5. Denuit, Michel & Robert, Christian Y., 2023. "From risk reduction to risk elimination by conditional mean risk sharing of independent losses," Insurance: Mathematics and Economics, Elsevier, vol. 108(C), pages 46-59.
    6. Denuit, Michel & Robert, Christian Y., 2021. "Efron’s asymptotic monotonicity property in the Gaussian stable domain of attraction," Journal of Multivariate Analysis, Elsevier, vol. 186(C).
    7. Michel Denuit & Jan Dhaene & Christian Y. Robert, 2022. "Risk‐sharing rules and their properties, with applications to peer‐to‐peer insurance," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 89(3), pages 615-667, September.
    8. Thomas Bernhardt & Ge Qu, 2021. "Wealth heterogeneity in a closed pooled annuity fund," Papers 2110.13467, arXiv.org, revised Aug 2022.

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    More about this item

    Keywords

    Risk pooling; Peer-to-peer (P2P) insurance; Law of large number; Central-limit theorem; Size-biased transform;
    All these keywords.

    JEL classification:

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

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